Buy now, pay later (BNPL) loans have exploded in popularity in recent years. As more young adults turn to these financing options, companies such as Affirm (AFRM -1.88%), Afterpay (AFTP.F), and Klarna have seen revenue growth accelerate.
Investors should expect the industry to continue growing rapidly. However, there are other factors you'll want to pay attention to, including increased scrutiny from regulators, as well as consumer credit-scoring companies paying more attention to these types of lenders. You'll want to take a wait-and-see approach on BNPL companies as more competitors enter the space, too. Here are four trends smart investors should keep an eye on as we enter 2022.
1. More online consumers will turn to BNPL
The growing popularity of BNPL options is especially strong among millennials and Gen Z. According to a survey by NerdWallet, 1-in-5 shoppers used BNPL options in 2021, with 22% of those surveyed being Gen Z customers.
Not only that, but several retailers have added BNPL options in the past year, including big retailers like Target and Amazon. They are turning to BNPL because they help boost sales.
In a study by Accenture and funded by Afterpay, BNPL transactions accounted for about 6% of all online spending in 2021. The consultant expects steady growth in use of this kind of financing, and the firm projects that 13% of all online transactions will involve the use of BNPL loans by 2025.
2. Big companies will pursue their own BNPL products
One driver of BNPL loan growth is more companies developing BNPL products of their own. One company that has expanded in BNPL is PayPal, which in September purchased Japan-based BNPL lender Paidy for $2.7 billion. Block, the company formerly known as Square, is another business that made a splash in the BNPL market when it bought Afterpay, based in Australia, for $29 billion in August.
Banks may also be expanding into this area as well. According to McKinsey, banks lost $10 billion of annual revenue to fintechs offering BNPL products. In September 2021, Goldman Sachs spent $2.2 billion to buy GreenSky to boost its consumer-finance unit. Ruby Walia, an advisor for the digital banking and consulting firm Mobiquity, told Yahoo that he expects more banks to introduce BNPL products next year, further increasing competition.
3. Regulators will increase scrutiny of these loans
With the explosion in popularity of BNPL among younger adults, the Biden administration probably will take a more critical stance toward these companies. The Consumer Financial Protection Bureau (CFPB), created under former President Barack Obama, has asked BNPL companies, including Affirm, Afterpay, and PayPal, to provide the agency with information about the risks and benefits of BNPL options.
One issue is that BNPL products have fewer protections than credit cards. For example, returning goods or disputing fraudulent or erroneous charges made under BNPL programs can be much harder. The CFPB is also concerned about how much debt consumers are racking up and the amount of data being collected on their spending patterns.
These BNPL companies have until March 1 to submit this data, which could lead to their business practices come under increased scrutiny.
4. Credit-scoring companies will begin including these loans on credit reports
Finally, consumer credit-scoring companies will begin paying more attention to BNPL loans, which will likely play a more significant role in credit reports than in the past. In general, most BNPL lenders haven't reported payment history to credit agencies unless the loan was sent to a debt collector.
Credit-scoring company Experian said it was already including BNPL loans in consumers' credit reports. Meanwhile, Equifax said it would begin adding BNPL loans to consumers' credit files starting next month.
As BNPL loans become more widely used for online transactions by younger consumers, it's good to see rating companies pay more attention to these loans, which can help those with lower credit scores build a credit history.
Increased oversight is a good thing
This year should be interesting for the BNPL industry. Increased regulatory oversight and interest from credit-scoring companies will treat BNPL loans more like traditional loans. I think this could legitimize these payment options in the long run while also protecting consumers.
Increased competition from banks and other major companies could challenge many of these BNPL companies. In the coming years, we could see more industry consolidation and acquisitions, continuing the trend set last year by PayPal, Block, and Goldman Sachs.