Credit Risk

BNPL Tailwinds and Headwinds

BNPL Tailwinds and Headwinds

September 16, 2022 | Sharla Godbehere

After experiencing remarkable growth over the past couple years, what lies ahead for Buy Now Pay Later? In general, forecasts are positive. Businesswire reports that BNPL payment adoption is expected to grow at a CAGR of 32.5% over six years. But, providers face both opportunities and challenges that will likely impact their future growth trajectory. 
 
Equifax delivers unique data and advanced analytics, through a cloud-native data fabric to help BNPL providers innovate, compete, and grow. Let’s take a closer look at some of the growth drivers and inhibitors that could influence BNPL results.

Tailwinds

BNPLs enjoy the advantages of some organic and adaptive growth drivers. These tailwinds will help sustain growth for the industry. They will especially help those providers that strategically adapt to opportunities.

Shopper demographics and preference 

BNPLs are riding the wave of global expansion. Australia and Europe got an early start, leading the introduction of BNPL financing. North America is now the largest market, but Asia Pacific is the fastest growing.¹ 


 

Age demographics may also provide a natural lift for BNPLs. As the Generation Z comes of age and exerts more consumer purchasing influence, BNPL providers should expect a lift. An Equifax study of BNPL applicants in the U.S. confirmed that user demographics skew towards younger shoppers. The same study reported that 20% of applicants are new to credit. Some young shoppers will use credit for the first time by responding to a BNPL offer at a merchant point of sale.
 
The majority of BNPL transactions are still initiated through online point of sale. A June 2022 study reported shoppers returning to stores in 2022. Online shopping as a percentage of retail sales has receded from pandemic highs. Yet, there is little doubt that consumer preferences have shifted in ways that will continue to support the growth of online channels. 

Expanded merchant services

In just three years, BNPL went from an uncommon payment method to an option on most online check-out pages. This booming growth reflects the breakneck pace at which BNPLs established partnerships with merchants. Some observers have likened this phase to a “land grab.” At this point, most large merchants have already partnered with a BNPL In response, BNPL providers are developing expanded services to help justify merchant fees and to differentiate themselves from competitors. 
 
Besides their primary value proposition to merchants - higher cart values and lower abandonment rates - some BNPLs are offering sales and marketing support services as well. Others are responding to merchants’ requests for more financing terms to help influence a broader range of shoppers. BNPL providers can also help merchants offer a more personalized shopping experience. Information from customer account profiles and third party companies, like Equifax, provide the insights needed. 
 
In the future, BNPL could become a more direct and integral part of consumers’ daily lives through the development of apps and digital wallets. Until then, merchant partnerships will remain crucial to BNPLs’ success, providing exposure to new consumers at the point-of-sale.

Cultivated customer relationships

BNPLs have grown quickly by reaching large numbers of consumers through merchant point of sale systems. For most users, their first encounter with a BNPL provider is through a merchant’s online checkout. However, once the consumer establishes an account, a BNPL has the opportunity to nurture the relationship for greater value.
 
Some BNPLs have initiated more direct consumer advertising, no longer limited to merchant point of sale account acquisition. Others are developing online buying hubs, building greater influence on shopping habits, and more leverage with preferred merchants. Expanding direct consumer relationships opens the opportunity for more services to help sustain BNPL growth and build profitability.
 
Providers that choose to become advocates for consumer financial health may find more opportunities to enhance customer relationships. BNPLS have used alternative data to expand credit access to customers who may have otherwise been denied. Some BNPLs are already prioritizing ways to help consumers borrow responsibly. Creating ways to limit over-borrowing, prevent credit stacking, and help consumers build credit history through credit reporting will be crucial to growing strong relationships with consumers.

Headwinds

Despite BNPL provider advantages, there are several growth inhibitors to be aware of. These headwinds will challenge growth and profitability over the coming quarters. 

Cost of capital

Already struggling with profitability, BNPLs may find traditional interest free Pay-in-4 financing offers less affordable. This will be particularly true as rising interest rates increase the cost of capital for lenders. Many BNPL firms have been backed by venture capital, and profit has been a secondary concern to market share thus far. According to the Financial Times, none of the three largest standalone BNPL firms are currently earning a profit. In fact, all three firms lost more money in 2021 than in previous years.³ As funders seek positive returns on their investments, profitability will matter more in the years ahead.

Consumer repayment risk

High rates of consumer loan defaults present another challenge to BNPLs’ profitability. Equifax research suggests that nearly 70 percent of BNPL users have less-than-prime credit scores, compared with just a quarter of the general credit population. The data suggest that BNPL borrowers are similar to the overall credit population in terms of the size of their credit file; they are simply using BNPL as an alternative or addition to other forms of credit, such as credit cards. The same study found that BNPL users tend to have significantly higher credit utilization rates than the general credit population. The subprime credit scores and high utilization rates of BNPL borrowers indicate that they could be at higher risk of late or non-payment. 
 
A 2021 survey found that nearly 40 percent of U.S. BNPL users report they have fallen behind on their payments at least once.⁴ Another survey found that less than half of BNPL applicants were “very confident” that they could pay off their loans in full without missing a payment.⁵ Also, a recent Morning Consult survey found that one in five U.S. adults who took out a BNPL loan in January 2022 missed a payment.⁶
 
While delinquency and default rates remain near historic lows, these traditional measures of financial stress will almost certainly rise in the months ahead due to high inflation and the end of pandemic-era support measures. Early signs are already emerging: according to the Census Bureau, the share of Americans who are struggling to afford household expenses has risen steadily since late summer 2021. It now stands at 34.4 percent as of May 2022.
 
Klarna, Affirm, and Afterpay all accept credit cards as payment.  According to one poll, 22 percent of BNPL users report using credit cards to pay off their BNPL loan.⁷ This behavior, also known as credit stacking, increases the risk of consumers accruing unsustainable levels of debt and could lead to an increase in charge-offs, which would further degrade BNPL profitability. Other concerning consumer behaviors include using BNPL for recurring household expenses like groceries and gasoline.

Currently, many consumers purchase nonessential items like electronics and fashion rather than household essentials with BNPL. Yet, some data suggest that more consumers are moving toward using BNPL for everyday purchases: a March 2022 survey found that 53 percent of consumers who have used BNPL products did so to pay for items out of necessity.⁸ Another study found that nearly one in five BNPL customers use the service at discount stores, and 13 percent use it at supermarkets.⁹

Increased regulatory scrutiny

New regulations may also become a challenge to BNPL firms. As BNPL continues to grow, government regulators, both in the United States and abroad, are looking at point-of-purchase loans with more scrutiny. 
 
Regulatory authorities in the United Kingdom and Australia are carefully examining the industry in both countries. Their policy directions may set a precedent for BNPL regulation and will be important as U.S. regulators consider tighter restrictions on the industry. In the United States, several states have begun regulating BNPL. In California, BNPL plans have been classified as loans, bringing them under their regulatory umbrella.¹⁰

Nationally, the Consumer Financial Protection Bureau (CFPB) opened an inquiry into BNPL in December 2021, signaling the potential for regulatory activity. Specifically, the CFPB asked five of the largest BNPL providers to report data that will clarify the risks and benefits of BNPL to consumers. In response to the CFPB’s inquiry, 21 attorneys general submitted comments encouraging CFPB to take a stronger regulatory stance in response to BNPLs, citing concerns of regulatory arbitrage and arguing that BNPL products were evading consumer protection laws.
 
Increased regulation would add an immediate challenge to the rapid growth in the BNPL industry, but in the long run could be a positive development for sustained BNPL growth and profitability if it increases trust among merchants and consumers.
 


1 https://www.precedenceresearch.com/buy-now-pay-later-market
2  https://www.cnn.com/2022/06/16/business/online-shopping-stores-retail/index.html 
3 Kelly, J. (2022). "Is BNPL a Viable Business Model?" Financial Times.
4 Lapera, G. (2021). "BNPL Missed Payments." Credit Karma.
5 Schulz, M. (2022). “BNPL Loan Statistics: 2022.” Lending Tree.\
6 Williams, C. (2022). "BNPL Users Significantly More Likely to Overdraft than Nonusers." Morning Consult.
7 Credit Karma (2022). "Consumers rely on BNPL amid record inflation, use credit to pay it off."
8 Miranda, L., (2022). “How consumers use buy now, pay later apps to pay for food, gas and other basics.” NBC News citing Credit Karma (2022).
9  Credit Karma (2022). “Consumers rely on buy now, pay later amid record inflation, use credit to pay it off.”10  Povich, E. (2022). “Regulators Scrutinize BNPL Plans.” Pew Research.
10 Povich, E. (2022). “Regulators Scrutinize BNPL Plans.” Pew Research.

Sharla Godbehere

Sharla Godbehere

FinTech Leader

Sharla leads the team focused exclusively on the rapidly evolving FinTech industry. She connects the power of data, technology, and analytics with today's future-designing companies to expedite responsible growth in lending. Sharla assists FinTechs and alternative lenders in leveraging Equifax’s unique data to make bet[...]