‘Buy now, pay later’ explodes in popularity

Online shopping has been on a tear since 2020, and the “buy now, pay later” industry rode its coattails into 2021.

One of the leading players, Australia-based Afterpay, reported $6 billion in incremental sales and $3 billion in benefits for small businesses in 2020. Its U.S. sales were up 195% to $4.1 billion. Klarna counted its 15 millionth market user, signifying 205% year-over-year growth in monthly users. Another big player, Affirm, saw a 90% stock price jump in January 2021 after its IPO.

Buy now, pay later grew in 2021

Buy now, pay later (BNPL) only represents about 2% of Americans’ spending on online retail purchases so far in 2021, according to a recent analysis by Accenture. But the growth of this relatively new payment method is on a tear, with projections forecasting that BNPL could account for 6% of online retail spending in the U.S. by the time 2021 concludes.

Compared to January 2020, Accenture found that BNPL spending had increased a whopping 230% by June 2021. In contrast, paying with plastic has inched up much more modestly. Debit card spending over the same time period grew 43%, while credit card spending was up just 8%.

As a fledgling payment method in the U.S., BNPL is mostly used in just a few categories: electronics, fashion, health and beauty and home goods. But with many additional categories expected to become available for BNPL purchase, Accenture projects that BNPL could account for more than 10% of U.S. retail spending by 2024.

The Accenture study also found that users of Afterpay, one of the most popular BNPL platforms, were only half as likely as credit card users to let their account become 90 or more days past due.

Large, established financial institutions have caught on to the popularity of this installment plan product, too. American Express launched Pay It Plan It in 2017 and the Citi Flex Plan followed in 2020. Mastercard also recently announced its BNPL plan, called Mastercard Installments, in September 2021.

And PayPal has a lot of skin in this game as well, dating back to its 2008 acquisition of Bill Me Later. PayPal currently offers two different buy now, pay later concepts (PayPal Credit, which centers around a six-month 0% deferred interest promotion and Pay in 4, another of the interest-free six-week installment plans).

How buy now, pay later plans work

The most common example involves paying off a purchase in four installments spread over six weeks with no interest. Sometimes you can get a lot more time with 0% APR, like Affirm’s 39-month 0% partnership with Peloton that allows some customers to pay as little as $49 per month for a bike worth nearly $2,000.

Other times, stretching beyond those first six interest-free weeks can cost you substantially (up to 30% APR). The terms vary depending on the service, the retailer and your personal circumstances. Soft credit checks are common. The application process is quick and easy, but even this cursory glance can result in rejections or higher rates for applicants with lower credit scores or a lot of debt.

I see the appeal, but it’s not my preferred payment method. I suggest using a credit card and paying it off before interest accrues, thereby eliminating the one big con and enjoying credit cards’ superior rewards programs, fraud protection and other buyer protections (such as extended warranties and purchase protection).

Debit cards and buy now, pay later companies don’t come close in any of those areas. Still, just like you and I might order different meals from a restaurant menu, we might make different payments choices.

Who uses buy now, pay later

Conventional wisdom was that buy now, pay later was for young people without much money or much credit. This is still true to some extent – picture the Gen Zer without a credit card who wants to finance some new clothes, electronics or furniture. But nowadays, most buy now, pay later users are the so-called HENRYs (high earners not rich yet).

Cornerstone Advisors reports that seven in 10 buy now, pay later customers earn more than $75,000 annually. They tend to be college graduates and the vast majority have credit cards. Bank of America adds that they’re usually in their 30s and the typical purchase they finance is between $200 and $500.

The sweet spot is a debt-conscious consumer who wants the flexibility to finance a purchase but with the certainty of a clearly defined payoff date. Open-ended credit card debt scares them. But if they know exactly how much they owe per month, and exactly how many weeks or months the loan will last, this makes them feel better.

Bottom line

There’s certainly a place for buy now, pay later in the payments ecosystem. Still, I believe you should tread carefully. There’s always a risk of buying something now that you may not be able to fully afford. While you may feel better about paying it off in six weeks or six months, what if you can’t? Debt, late fees and credit score damage could pile up.

Also, buy now, pay later plans don’t usually report positive payment information to the credit bureaus, and some customers have difficulty resolving disputes about returns, damaged merchandise and other aspects of the transaction.

For all these reasons and more (like rewards), credit cards are generally the superior choice, particularly if you can avoid interest. And if you can’t, maybe it’s best to hold off on that discretionary purchase.

Have a question about credit cards? Email me at ted.rossman@creditcards.com and I’d be happy to help.