Published in: Research | July 20, 2020
By: Maurie Backman
Back in the day, it was common practice to walk into a store and put items on layaway. You'd put down a deposit, make payments over time, and collect your purchase later once it was paid off.
Buy now, pay later (BNPL) services have one key difference: You don't have to wait to bring home the item(s) you buy.
It's for this reason that BNPL services are gaining popularity.
In fact, according to Adam Ezra, co-founder and co-CEO of BNPL service QuadPay, "In the past three years, QuadPay has grown significantly, serving over 2 million consumers and thousands of retail partners on its platform."
Ezra continues: "Year over year, our user base has grown exponentially, and we're positioned to more than double it in the next six months."
Geoff Kott, Chief Capital Officer at Affirm, tells a similar story. "Since Affirm was founded in 2012, we have seen a keen interest in our product evolve over time as consumers continued to be weary of added credit card debt while looking for flexibility to purchase and pay over time."
"Affirm currently partners with over 6,000 merchants and has serviced more than 5.6 million consumers," says Kott.
We surveyed over 1,800 people about their experience with BNPL services, and here's what we found.
BNPL services let you shop for the items you want and pay them off in interest-free installments. There are no fees if you make your payments on time. You get approved on the spot, then complete your transaction and wait for the product to ship.
Some BNPL services partner with physical stores, too, so you can walk away with your items and pay them off later.
These services usually have a short repayment period -- often 12 weeks or less. Those payments may be broken up into installments (often four or more).
Consumers can choose from a host of buy now, pay later services. We asked our respondents which services they had used. Here's what they said:
37.65% of our respondents had used a buy now, pay later service, but they're less common among consumers in their mid-50s and beyond. Here's how usage breaks down by age:
|Age range||Percentage of consumers who have used a BNPL service|
A report from PYMNTS.com reveals that 87% of consumers aged 22 to 44 are interested in monthly installment plans similar to the ones offered by BNPL services. And 40% of millennials and 57% of Gen Xers have already used such services.
BNPL usage has also increased in recent years. Our research showed that among people who have used a BNPL service, 44.51% first did so in 2019, while 20.83% first did so in 2020 -- possibly because of COVID-related income loss. By contrast, only 7.42% had used a BNPL service prior to 2015.
Why the recent uptick in demand?
As Ezra explains, "67% of millennials don't have a credit card at all -- either because they aren't approved for one based on their credit history, or they simply prefer to avoid traditional credit. Many don't think it makes sense to use credit for lower value, everyday purchases that could impact their credit scores and come with hidden costs."
"As a result, buy now, pay later has emerged as an attractive option not just for millennials," continues Ezra, "but for all consumers seeking a better way to pay."
That said, BNPL usage isn't all that frequent, even among consumers who embrace it. Among those who use a BNPL service,
BNPL services let consumers buy things they want or need without the hassle and cost of credit card interest. With a buy now, pay later service, there's the potential to pay no interest at all, as long as items are repaid within the agreed-upon time frame.
In fact, BNPL services are a great option for emergency purchases that consumers don't want to put on a credit card. Many consumers don't have a credit card to begin with, so buy now, pay later lets them maintain better cash flow by not having to swipe a debit card and have those funds instantly removed from a checking account.
When asked why they use buy now, pay later services, here's what our respondents told us:
|Reason for using BNPL service||Percentage of respondents who use BNPL for this reason|
|To avoid paying credit card interest||39.37%|
|To make purchases that otherwise wouldn't fit in my budget||38.37%|
|To borrow money without a credit check||24.68%|
|I don't like to use credit cards||16.26%|
|I can't get approved for a credit card||14.41%|
|My credit cards are maxed out||13.98%|
|I don't have bank accounts||3.28%|
It's also clear that consumers -- particularly young ones -- are actively looking to escape the credit card trap.
As David Sykes, Head of Klarna US, explains, "It was millennials and young people who grew up with an experience and understanding of the impact on their families of carrying debt."
Says Sykes, "Millennials have now been using debit cards more and seeking alternatives to credit cards for when they need some flexibility. This becomes increasingly more evident across wider demographics as consumers move away from revolving credit lines."
And he says Klarna is proud to have "established an entirely new payment category that has proven hugely popular with today's smart consumers looking for better ways to shop and pay."
So what do people use BNPL to buy? Here's what our respondents said they had purchased with a buy now, pay later service:
Many major retailers let customers buy now and pay later. Amazon, Target, and Walmart, for example, partner with BNPL services. And you can access other merchants through the BNPL providers' apps.
Though different BNPL service providers partner with different retailers, these are just some of the stores where you can buy now and pay later:
To see which stores you can shop, simply visit the site of the BNPL provider you wish to use and browse through your choices.
We asked respondents how well they understand BNPL terms and conditions on a scale of 1 to 5 (1 being the least amount of understanding and 5 being a strong understanding). This is how the responses shook out:
|Understanding level||Percentage of respondents with that level of understanding|
Responses varied greatly among people who had and hadn't used the services, though.
Almost half of people who hadn't used a BNPL service said they didn't understand the terms and conditions at all, while less than 10% said they understood them completely.
On the other side of the spectrum, less than 1% of people who had used BNPL said they didn't understand the terms at all, while 43% said they understood them completely.
While it's good that many people feel they understand the terms of the services they used, we'd definitely like to see more understanding among the people who have used these services.
We asked people who hadn't used a buy now, pay later service why they hadn't used one. Here's what they said:
At first glance, BNPL services might seem like a great alternative to credit cards. When you charge expenses on a credit card and don't pay your bill in full later that month, you accrue interest charges. And if you carry too high a balance, it can hurt your credit score.
With a BNPL service, you're generally approved instantly because these services usually don't perform credit checks. And you can avoid credit card interest while getting more time to pay.
But BNPL services have their drawbacks, too.
For one thing, if you default on your payment agreement, that negative activity will get reported to the credit bureaus, and once that happens, your credit score can plunge.
Furthermore, while you won't pay interest on your purchases if you stick to the payment schedule your BNPL service has outlined, once you're late, you'll be liable for late fees and interest. And that interest that can exceed that of a credit card.
|BNPL service||Interest rate||Late fees|
|Affirm||Up to 30%||None|
|Afterpay||0%||Up to 25% of your initial order value (per purchase)|
|FuturePay||$1.50 for every $50 in unpaid balance*||Up to $38 (per payment)|
|Klarna||0%||Up to $7 (per payment)|
|PayPal Credit||23.99%||Up to $39 (per payment)|
|QuadPay||0%||Up to $21 per purchase|
|Sezzle||0%||$10 per payment|
|Splitit||0%||None (though your credit card will charge late fees)|
BNPL services can lead to impulse buys. Granted, so can credit cards, but credit card issuers at least set a credit limit based on your financial picture -- namely, the information you provide when you apply. BNPL services don't run the same financial checks, so they might lead you to make purchases you can't afford.
Furthermore, 13.98% of the people we surveyed who have used a BNPL service did so because their credit cards were maxed out. That's not a situation in which anyone should be taking on more debt.
Among those who have used a BNPL service, 21.68% say they've been late with a payment or incurred late fees. Furthermore, 29.65% of all respondents say they don't understand the terms and conditions of these services at all. It's therefore easy to see how consumers could go astray and wind up in a deep financial hole.
"Buy now, pay later services can be useful tools for consumers who don't have the funds to make an important purchase. Not paying credit card interest is always good, too," says Nathan Hamilton, director of The Ascent.
"But these services can provide a false sense of security. Because credit checks aren't usually required, the people using BNPL may not be in a financial state to repay their debt," continues Hamilton. "That leads to defaults and can negatively impact consumer credit scores."
"While buying now and paying later isn't always a bad idea, it's very important to be careful when determining how much you can afford to pay, especially since your repayment window will only span a few months."
BNPL services are a viable alternative to credit cards. When used correctly, they can help you avoid the interest you'd otherwise rack up for purchases you pay off over a short period of time.
If you're going to use one of these services, make sure you're in a position to make your payments. And also, pay attention to your repayment terms. Make sure you know how many payments you're supposed to make and when in order to avoid interest and fees. Each service provider sets its own rules on repayment, so you'll need to read the fine print to avoid making a costly mistake.
The Ascent distributed this survey via Pollfish to 1,862 American adults ages 18 and over on July 7th, 2020. While efforts were made to create a representative sample, there is variability in any sampling method, and no strict statistical testing was performed.
Respondents were 60% female and 40% male. Age breakdown was approximately 9% 18–24, 25% 25–34, 21% 35–44, 12% 45–54, and 32% over 54.
Some percentages may not total to 100% due to rounding.
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