Editor’s note: The following is a guest post by Kendrick Sands, head of consumer finance research at Euromonitor International. Views are the author’s own.
Buy now, pay later expanded the spending power of most Americans in recent years. This flexible payment option allowed several non-traditional lenders to enter the finance space and provided a new standard for convenience and transparency in lending overall.
However, there are now concerns about how quickly BNPL has grown and if consumers are borrowing at a sustainable rate. Plus, inflation and profitability recently slashed valuations of the leading pure-play BNPL companies.
A rebrand for traditional payment plans
While BNPL might seem like a new phenomenon, it is simply a rebranding and expansion of traditional installment payments commonly used for higher-ticket durables. The difference now has been fintech expanding who has access to it and how it is done.
Online spending surged during the pandemic and partially drove the uptake of BNPL. Low interest rates and merchants desperate to maintain sales created the perfect environment for BNPL and offered a way for several retailers to get around lower, or completely absent, in-store sales. According to Euromonitor International, total e-commerce sales of goods in the U.S. increased by 65% from 2019 to 2021 to reach $787 billion.
BNPL offers a no-cost financing alternative, which is particularly attractive for cost-conscious shoppers. Tech-savvy millennials and Gen Z customers were the key first adopters of this lending alternative. But sustained growth will be driven by older consumers as well. BNPL can significantly broaden potential buyers for a retail channel, enhance the customer experience and build loyalty.
Despite recent gains, there remains significant opportunity for BNPL in the digital space. According to Euromonitor, e-commerce sales will account for 36% of total U.S. retail sales in 2026, up from 26% in 2021, amounting to an increase of $468 billion in spending.
Regulatory and competitive challenges pose threats
Initially, there were few limitations for BNPL providers from a regulatory point of view. However, several markets are expanding rules and oversight of the sector.
BNPL can increase access to lending for unbanked or financially underserved consumers. However, this segment is most likely to have a low level of financial literacy and therefore is vulnerable to default or unfair lending terms. Offering the necessary education and transparency could alleviate this risk but would likely raise the cost to lenders. Finding the balance between transparency and education is going to continue to be a key challenge.
One possible solution would require reporting loans to credit scoring institutions. This layer of verification could also raise the cost to lenders and push out consumers that are unbanked due to a poor credit score. With repeated checks, the lending channel could end up lowering consumers’ credit scores and eliminate the convenience that is currently driving the lending channel. Striking the right regulatory balance is crucial to make BNPL beneficial for merchants, lenders and consumers in the U.S.
Euromonitor estimates that BNPL and other personal lending in the U.S. will reach an outstanding balance of $326 billion by 2026.
While regulation is debatably the single greatest uncertainty for BNPL, rising interest rates and a crowded competitive landscape also raise significant concerns. BNPL thrived in a low interest rate environment but transitioning to a model where inflation is a key consideration will require some restructuring. With higher inflation, BNPL can serve as a significant discount to the consumer but ends up negatively impacting merchants or lenders.
Opportunities on the horizon
The number and type of companies offering BNPL has steadily increased globally. Pure-play BNPL lenders are pivoting to offer additional financial products or marketplaces to make the most compelling pitch to customers.
For example, Affirm in the U.S. partnered with several merchants and marketplaces, offers debit and virtual cards, and provides longer fixed interest rates spread out over a year. Providing nearly every payment option in a clear and transparent way is appealing for consumers who may have or had high levels of credit card debt at much higher interest rates.
While many retailers now offer a BNPL option, it is not completely universal, leaving opportunity to reach more merchant segments going forward.
The increased purchasing power that BNPL provides can drive growth for merchants, and integrated tools could enhance customer relationships. Providing more information about spending habits or preferences can drive tailored interactions between the merchant and the customer. Access to this type of data would make BNPL partnerships more appealing to retailers rather than creating in-house solutions, which might only capture the additional spending potential.
Despite regulatory uncertainties, increased competition or rising interest rates, BNPL won’t disappear anytime soon. This payment solution is beneficial to consumers and merchants and has unlocked potential spending that wasn’t available before.
With regulation comes higher transparency, which will reinforce consumer confidence in the lending process. Greater competition leads to more innovation in determining credit worthiness, security and overall convenience. Even with these challenges, BNPL should remain a fixture in retail payments going forward.