Buy now-pay later payments proliferate

Dive Brief:

• Setting a “new record for e-commerce,” online consumer spending between Nov. 1 and Dec. 31 rose 4.9% year over year to $222.1 billion, according to an analysis from Adobe Analytics.
• Consumer spending was driven in part by discounts that “hit record highs” during the season across categories including electronics, toys and apparel. 
• Consumers spent $16.6 billion online using buy now, pay later services over the holiday season, a 14% jump from last year and an all-time high, per Adobe Analytics. Throughout 2023, consumers spent $75 billion online via BNPL payment platforms, up 14.3% from 2022.

Dive Insight:

Adobe’s online holiday shopping projection was nearly spot on. In its October forecast for the 2023 holiday sales figures, Adobe Analytics predicted that e-commerce sales between Nov. 1 and Dec. 31 would reach $221.8 billion, a 4.8% increase compared to 2022.

Online consumer spending increased 6% year over year in November to $123.5 billion, driven in large part by the $38 billion spent online between Thanksgiving and Cyber Monday. The following month, shoppers drove a 3.7% year-over-year bump in online spending to $98.6 billion, according to Adobe.

While the overall holiday season drove growth in buy now, pay later sales, Adobe found that Cyber Monday BNPL purchases spiked 42.5% from last year to $940 million, marking the biggest day on record for BNPL purchases. Throughout November, buy now, pay later transactions increased 17.5% from 2022 to $9.2 billion, making it the biggest month on record for the payment method.

The rise in 2023 BNPL sales signals a continuing trend of consumers turning to the installment payment method to finance their holiday purchases. 

“In an uncertain demand environment, retailers leaned on discounting and flexible payment methods to entice shoppers this holiday season,” Vivek Pandya, lead analyst at Adobe Digital Insights, said in a statement. “The strategy was effective, driving record spend online during big days like Cyber Monday and Black Friday, and a record 11 days that surpassed $4 billion in daily spend this season.” 

With more consumers turning to installment payment plans to fund their holiday shopping, BNPL providers have seen a boost in orders. Klarna said that U.S. shoppers placed 29.5% more orders on Black Friday this year compared to last year.

Adobe also accurately forecast the rise in mobile shopping during this year’s holiday season. More than half (51.1%) of online shoppers transacted via smartphones this holiday season, an increase from 47% a year ago. Consumers spent the most via mobile on Christmas Day, driving 63% of online sales, Adobe found.

Dive Brief:

• New York Gov. Kathy Hochul announced Tuesday she’s pursuing buy now, pay later-related legislation that would require BNPL providers to obtain a license to operate in the state.
• The bill would also permit the state’s financial services department to propose and issue regulations for the industry, according to a slate of proposals from the Democratic governor’s office. In New York, a governor can introduce legislation by way of the executive budget.
• The legislation and potential regulations aim to “establish strong industry protections around disclosure requirements, dispute resolution and credit reporting standards, late fee limits, consumer data privacy, and guidelines to curtail dark patterns and debt accumulation and overextension,” the governor’s office said in Tuesday’s new release.

Dive Insight:

The BNPL-related legislative proposal is part of Hochul’s agenda aimed at strengthening consumer protections. Current consumer law covers deceptive business practices, but New York is one of just eight states whose law doesn’t protect against unfair and abusive practices, the governor’s office noted in the release.

A spokesperson for Hochul’s office said specific legislative language will be unveiled as part of the governor’s executive budget presentation later this month. 

As consumers increasingly tap BNPL loans for everyday and larger purchases, Hochul is directing the state’s department of financial services “to put stronger regulatory guardrails around the buy now, pay later loan industry,” she said during a speech Tuesday.

The governor’s announcement seems aligned with other government actions last month related to BNPL, including the Office of the Comptroller of the Currency’s guidance for banks related to BNPL lending, said Eamonn Moran, senior counsel at law firm Norton Rose Fulbright specializing in consumer financial services. The same is true of a letter from a group of Democratic senators to Consumer Financial Protection Bureau Director Rohit Chopra urging BNPL oversight, Moran said in an interview.

Where California already requires providers to obtain licenses to issue loans, New York appears to be taking a dual-pronged approach by focusing on licensing and regulation, said Moran, a former counsel at the CFPB’s Office of Regulations. Additionally, the BNPL-related concerns mentioned by Hochul’s office seem to mirror those the CFPB has mentioned in past reports, he said.

At the federal level, the specter of regulation has loomed over the BNPL industry since the CFPB launched an inquiry into the five biggest players — Affirm, Afterpay, Klarna, PayPal and Zip — in December 2021. The CFPB said in September 2022 that it was considering “interpretive guidance” or rules for the industry. Moran expects that guidance might land this year. 

Max Levchin, the CEO of San Francisco-based Affirm, in November acknowledged oversight from the CFPB, saying supervision “levels the playing field” in the BNPL arena. Affirm already holds a number of licenses in states that require them from BNPL operators, including lending and money transmitter licenses, a company spokesperson told Payments Dive Wednesday. 

The spokesperson reiterated that Affirm’s “top priority is empowering consumers by providing a safe, honest, and responsible way to pay over time with no late or hidden fees. This includes underwriting every transaction before extending credit, giving consumers control over their privacy choices, and providing consistent and transparent disclosures at checkout.”

A spokesperson for Sweden-based Klarna declined to comment. A spokesperson for Block-owned Afterpay didn’t immediately respond to a request for comment.

Democratic senators urged the Consumer Financial Protection Bureau this week to be vigilant in monitoring buy now, pay later offerings, especially during the holidays, so it can curb tools that “prey upon consumers.”

Sen. Sherrod Brown, who is the chairman of the Senate Committee on Banking, Housing and Urban Affairs, along with Sens. Raphael Warnock of Georgia and John Fetterman of Pennsylvania made the plea in a letter Monday to CFPB Director Rohit Chopra.

“We urge you to continue focusing on this increasingly popular form of consumer credit and use the full range of your authority to ensure that it is not used to prey upon consumers,” the Monday letter said.

The letter followed a Banking committee CFPB oversight hearing last month in which Chopra said he would closely watch the increasingly popular payments tool. When consumers tap one of the many BNPL offerings available, they’re able to take possession of a good or use a service with only a down payment and a promise to pay the rest of the price over a period of time, sometimes interest-free and usually over four to six weeks.

The installment payment method has increased in availability in the U.S. over the past five years, with a surge of interest during the COVID-19 pandemic when many online shoppers first encountered the option. The payment method, offered by companies that include Klarna, Affirm, PayPal and Afterpay, was initially mainly available digitally, but is now increasingly offered in stores as well.

While BNPL has proven helpful to some consumers seeking to avoid interest payments and credit history hurdles, it has also shown signs of potentially encouraging risky debt profiles.

The CFPB has collected information on the new payment BNPL phenomenon and its purveyors, suggesting it may seek to further regulate the nascent industry. Nonetheless, it has yet to issue any particular guidance or guardrails directed specifically at BNPL providers. Nonetheless, some companies are bracing for increased scrutiny by the agency.

The senators said they were writing their letter now in light of the year-end holiday shopping season, when some consumers load up on debt to pay for gifts. They noted that BNPL is typically used for online purchases ranging from $50 to $1,000.

“BNPL may be structured to encourage consumers to purchase more and take on more debt,” said the letter, which was noted in a press release from the senators. “Unfortunately, consumers can overextend their finances in a short period of time, making the BNPL debt unmanageable.”

They noted that consumer use of BNPL payment options soared during the Black Friday and Cyber Monday shopping period, with $8.3 billion spent online using those tools, a 17% jump over last year, according to the letter.

“The increased use of BNPL and the debt burden being carried by the typical holiday BNPL customer make it all the more important that consumers are protected during the holiday season, whether they finance their holiday shopping using a credit card or BNPL loan,” the letter said.

The letter also pointed out that BNPL is often used by some of the most financially vulnerable U.S. consumers, including those who have low incomes, significant debt and low credit scores.

“The CFPB must ensure that BNPL does not become a method to take advantage of struggling consumers,” the letter concluded.

Intense competition, rising regulation, challenging economic times and persistent losses led credit rating agency Moody’s Investors Service to paint a dire outlook for buy now, pay later companies in a report last week.

In addition, dwindling investor interest in the companies and more expensive funding for their lending services have helped sour prospects, according to the Nov. 8 report on the worldwide industry. To date, the difficulties have resulted in at least five years of industry losses, paid for by venture capitalists backing the businesses.

“If losses are not contained this year and new equity injections are not secured, many BNPL providers may deplete their equity over the next few years,” the report said.

Moody's isn’t optimistic, predicting “few BNPL companies will remain independent.” “Some may be acquired, others may cease operations if their products cannot remain competitive in the market, or if they are unable to navigate the impending wave of regulation,” the report said, noting an Australian BNPL company, Openpay, shut down in February.

The biggest company globally, based on users, is the Swedish BNPL pioneer Klarna, with 150 million users, which dwarfs the Australian business Afterpay, now owned by San Francisco-based Block, with 16 million users, and Affirm, also based in San Francisco, with 14 million users, according to user data provided in the report.

BNPL benefited from a surge in online consumer demand for installment financing services during the pandemic, and more recently, some consumers are turning to it in the face of tough economic conditions. The general expansion of e-commerce will also help continue to lift BNPL, the report said.

Buy now, pay later is point-of-sale financing that lets consumers buy an item and take possession of it while paying for it over time, typically six weeks, in some cases without paying interest on the loan. To increase the potential for profits, some BNPL companies have started offering more interest-bearing loans and other services.

Still, the momentum of BNPL growth may not be sufficient to overcome a multitude of other challenges, the ratings agency said.

Specifically, competition in the BNPL arena is intense, with low barriers to entry allowing a slew of startups to enter the market — resulting in some 200 companies calling themselves BNPL providers last year, according to the Moody’s report.

Nonetheless, the bigger threat comes from large banks jumping into the ring. National Australia Bank, NatWest, Santander Bank, Citibank and JPMorgan Chase are among the banks offering BNPL-type services now, the Moody’s report said. Those financial institutions also have an advantage over BNPL companies in that their credit card networks have extensive reach and may offer services to merchants at lower rates, not to mention their more tested credit risk management, the report noted. 

In addition, tech giant Apple this year rolled out its Apple Pay Later service in another move that boosted competition. Apple’s offering, backed by bank Goldman Sachs and card network Mastercard, has immediate extensive reach through its dominant position in the digital wallet market, Moody’s said. 

Aside from competition, another obstacle for the industry is rising regulation worldwide. Moody’s enumerated regulatory moves to rein in BNPL in the U.S., the U.K., Sweden, Singapore and Australia as well as by the European Union. With regulators seeking to protect consumers and ensure all BNPL financing abides by the same standards, profits may shrink and compliance costs will likely rise, Moody’s predicted.

“To survive, BNPL firms must slash costs or increase revenues while maintaining volume growth and market shares,” Moody’s concluded. If they cannot, rising competition from incumbent banks and large tech companies will likely push many from the market.”

Everyone’s buying now and paying later. At least that’s what the prevalence of BNPL buttons on online checkout pages would lead you to believe.

Buy now, pay later is point-of-sale financing that allows consumers to make a purchase and pay for an item or service over a set period of time, often without interest. It’s exploded in the past few years, appealing to consumers seeking quick access to credit or those turned off by credit cards. It’s also attractive to merchants — from retailers to restaurants — gunning to increase a shopper’s basket size or close a sale. 

The payment trend first gained traction in Europe and Australia about a decade ago. In the U.S., BNPL took off with the rise of e-commerce during the COVID-19 pandemic. Consumers stuck at home and flush with cash tried the financing tool to buy clothes or home goods. 

More recently, soaring inflation and high interest rates have inspired some shoppers to tap BNPL for everyday purchases, to spread out payments and avoid interest charges.

Using BNPL at checkout tends to be a seamless process for shoppers. That’s helped fuel its growth, especially with digital native generations that expect such experiences. “Being easy to use does matter when it comes to payment options,” said Sheridan Trent, director of market intelligence at The Strawhecker Group.

Initially, BNPL gathered momentum with millennial and Gen Z consumers, many of whom are turned off by credit cards, then it began drawing in other consumers, too. Nearly one-fifth of consumers have used BNPL during the past year, Federal Reserve Bank of New York researchers said in September. 

How it works

BNPL is essentially the opposite of layaway, where buyers could only take home an item once it was paid off. BNPL enables shoppers to obtain an item right away, and then continue paying it off in the weeks or months that follow. 

Consumers can access BNPL options through online checkout integrations on a merchant’s website or through BNPL providers’ apps or cards. Merchants are willing to pay higher fees for BNPL services than they would for credit card acceptance on the belief that customers will be enticed to spend more and complete the sale.

When a shopper chooses a BNPL company as their payment method at the point of sale, either online or in-store, the shopper gives the BNPL provider personal information such as address, phone number, date of birth or Social Security number. Then, BNPL companies typically perform a digital soft credit check within seconds before approving or denying a shopper for an installment plan.

The version of BNPL that’s most widely marketed by providers is an interest-free, pay-in-4 plan. Those offers allow consumers to make an initial payment when they buy an item, followed by three more payments, typically spread over six weeks. 

For a $100 purchase, for example, a shopper would make an initial payment of $25, followed by three more payments of $25, at two weeks, four weeks and six weeks from the point of sale. Consumers make those payments with debit or credit cards, or sometimes through an auto-pay function tied to their bank account. 

While BNPL companies play up their no-fee offerings, some providers do charge interest fees in certain instances, and some may also charge late fees. 

For instance, San Francisco-based Affirm does far more interest-bearing, longer-term installment loan volume than it does shorter-term, fee-free lending. And its interest rate on the former could be as high as 36%. Pay-in-4 loans made up 19% of Affirm’s gross merchandise volume for the fiscal year ended June 30, according to the company’s annual filing with the Securities and Exchange Commission.

Big players in the market

BNPL’s explosion has drawn a number of competitors from across the world to the market, all eager to grab their share of the pie. That includes pure-play BNPL providers such as Affirm as well as banks, card networks and Cupertino, California tech giant Apple. 

Afterpay, founded in Sydney and now owned by Block, was the biggest player in the U.S. market for the second quarter, based on Bank of America Securities data for monthly active users, though the data didn’t include PayPal. Globally, Stockholm-based Klarna was the BNPL leader by that measure for the period. 

Also jockeying for a piece of the action are Affirm; San Jose, California-based PayPal; Minneapolis-based Sezzle; and Sydney-based Zip. And some smaller competitors have sought to specialize in certain verticals, such as Uplift in the travel arena.

In the U.S., Klarna was second to Afterpay for the second quarter, averaging 3.31 million monthly active users, while Affirm averaged 3.26 million, according to the July BofA report. Monthly active users were those who opened the app at least once during the month.

PayPal declined to provide second-quarter figures, but as of the first quarter, 32 million customers had used the company’s BNPL service since its inception in 2020, a spokesperson said.

Meanwhile, Visa, Mastercard and American Express and banks like JPMorgan Chase and Citi typically offer existing cardholders the option to break a purchase into specific payments. 

Apple launched its installment lending service, Apple Pay Later, this year – a move that has the potential to shake up a fast-changing market. Trent expects Apple is already gaining market share because the company is intent on making its service easy to use within its digital wallet. 

Amid an intensely competitive environment, BNPL providers are still proving themselves to investors. They’ve largely posted losses in the past, and are under pressure from investors to post profits.

Consultants and professors have said that could be an uphill battle amid current market conditions. BNPL company job cuts have been widespread as the focus has shifted from growth to profits. Klarna posted a $1 billion loss for 2022, while rival Affirm reported a loss of $707.4 million in fiscal year 2022.

What’s next? 

BNPL is here to stay, but it’s likely to become a more regulated, consolidated industry than it is now, said Ed deHaan, a professor at the Stanford Graduate School of Business. “I think we’ll see the weaker firms die out, other ones get consolidated and some version of the product will certainly emerge and continue to be popular,” deHaan said.

Consolidation has already begun. San Francisco-based Block, formerly known as Square, agreed to acquire Afterpay for $29 billion in 2021. Zip bought QuadPay in 2020, and made an attempt to buy Sezzle last year, but later abandoned the deal.

As far as regulation, the Truth in Lending Act applies to the longer-term, interest-bearing BNPL loans, but it doesn’t cover pay-in-4 loans because it only applies to loans with more than four installments or those that add finance charges.

From a regulatory perspective, “it’s kind of a Frankenstein product,” said Michael Guerrero, a partner at law firm Ballard Spahr.

As the Consumer Financial Protection Bureau has taken notice of BNPL, it has expressed concerns about BNPL users taking on too much debt and BNPL providers engaging in data harvesting. 

In addition, the federal agency has urged credit bureaus to take a standardized approach to BNPL, but most of the installment providers still aren’t reporting their loan information to the credit bureaus. Guerrero expects the agency to clamp down on that BNPL-related issue. 

In pursuit of profits, many BNPL providers have expanded the services they offer, including branching into areas such as marketing or shopping assistance. They’ve also introduced new products like debit cards and pushed their services further into brick-and-mortar commerce.

To grow their share of consumer spending, the BNPL providers are also trying to diversify their customer set, partly by courting older, more affluent consumers.

Given higher interest rates and increased costs to fund loans, BNPL companies may increasingly make interest-bearing loans more of a standard in the industry because they’re more profitable, Guerrero said.