Millennials and Gen Zers have an addictive new way to buy stuff that would look familiar to their great-grandparents. “Buy now, pay later” is a type of consumer credit that really got going in the 19th century when Singer sewing machines were sold for a “dollar down, dollar a week.” But the modern fintech twist in “BNPL” is that it’s aimed at people making impulse purchases of fashion or jewelry or electronics rather than sofas or refrigerators. It’s delivered through apps that are wildly popular, leading to dizzying valuations of startups such as Klarna, Affirm and Afterpay. Regulators from the U.K. to Singapore worry that young borrowers are getting in over their heads.
1. How did it originate?
The “installment plan” is the precursor to today’s BNPL craze. Paying off purchases weekly or monthly evolved from 1840 onward, as makers of furniture, pianos and farm equipment looked to make products more attainable. Cars later brought installment credit further into the mainstream, though credit cards eventually became the preferred way to spread payments on smaller purchases.
2. Why not use credit cards?
They tend to be disliked by the young people flocking to BNPL; Britain’s Financial Conduct Authority cites data showing 25% of users are between 18 and 24 years old, and half are 25 to 36. As a group, young shoppers are wary of providers that profit when customers don’t pay their balances. They prefer the feeling of control they get from fast BNPL payment schedules, often spread over four to six weeks. Because of these, and because purchases are generally cheap, they’re usually interest-free.
3. What’s new here?
Most BNPL isn’t about buying big-ticket items; it’s about using an app to snap up that must-have jacket in the expectation that you’ll pay it off quickly. The average spend on a transaction in the U.K. using Klarna Bank’s app is 75 pounds ($99).
4. Why is it so popular?
The apps are simple and typically involve only minimal credit checks, or none at all with Afterpay Ltd., a Melbourne-based firm that offers payments spread over six weeks. Retailers — which pay the BNPL provider a small percentage of the transaction value, as they do with credit cards — frequently tell shoppers there’s “no need to wait until payday.”
5. What about late payments?
San Francisco-based Affirm Holdings Inc. doesn’t charge late fees, nor does Klarna on its “Pay in 30 days” product, though many of their peers do. BNPL customers who don’t pay bills are blocked from further purchases and may be passed on to debt collectors.
6. Who dominates?
Stockholm-based Klarna is the BNPL beast: With a $45.6 billion valuation, based on a June 2021 fundraising round, and 90 million users, there are huge expectations about an initial public offering, possibly within the next couple of years. Klarna’s biggest rivals, Affirm and Afterpay, have millions of customers, too, and the competition is intensifying as banks, credit card companies, fintechs and shopping sites team up to go after the business. U.S. tech entrepreneur Jack Dorsey’s Square Inc., a mobile payment company, agreed in August to acquire Afterpay for $29 billion. PayPal Holdings agreed to buy Japanese BNPL provider Paidy Inc. for $2.7 billion in September.
7. How big is BNPL?
Global sales using BNPL were $93 billion in 2020 and could top $181 billion by 2022, according to Bloomberg Intelligence. That’s still a small percentage of online retail — 1.6% in 2020 — but the share was growing fast. The U.S. is a juicy prospect because of lower BNPL penetration of the market there. Lifting that to levels seen in Australia and the U.K., among the most developed markets, would push yearly BNPL sales in the U.S. from about $20 billion to $100 billion.
8. What’s the worry?
That it could be a form of irresponsible lending. Some regulators worry that painless borrowing is a “gamification” of shopping similar to Robinhood Markets Inc.’s stock trading app, creating a sense that spending isn’t real. Consumers could load up on debt using different apps and then overdraw their bank accounts or take on credit card debt to service their BNPL accounts. The possibility that BNPL leads people into a chain of borrowing elsewhere could create hidden risk for the banking system. The Australian Securities and Investments Commission found that, over a year, 15% of BNPL users had to take out another loan to make their payments, and 1 in 5 cut back on buying essentials. Britain’s FCA says the sector must be regulated, Australia has a new code of practice designed to prevent customers from borrowing more if they’re having difficulty with repayments, and California has fined unlicensed lenders.