BNPL is poised for more growth in 2024
Buy now, pay later (BNPL) is ready for its close-up.
The 2023 holiday season confirmed that BNPL is gaining traction with both consumers and merchants. Adobe reports that online BNPL spending was $16.6 billion for the period, up 14% over the 2022 holiday shopping season. For all of 2023, BNPL purchases online totaled a record $75 billion, an increase of 14.3% over 2022.
Massive Growth is Coming in BNPL
BNPL has demonstrated remarkable growth since it was first introduced in its current form during the pandemic. The Federal Reserve Bank’s June 2023 Survey of Consumer Expectations reports that 19% of consumers have used BNPL as a payment method in the past year.
According to projections from Juniper Research, the global market for BNPL will expand from $334 billion in transaction volume in 2024 to $687 billion in 2028. In the U.S., Insider Intelligence/eMarketer sees BNPL transaction value rising from $80.8 billion to $124.8 billion over the same period.
It's little wonder the trend continues to grow. For consumers, BNPL offers unparalleled convenience at checkout, whether in-store or online. Shoppers have the option to choose to pay off their purchases in installments, usually with low fees and zero interest if paid on time and as agreed. They benefit from the ability to take home desirable products from apparel to electronics while managing their household budgets and preserving cash flow. In fact, more than half of consumers surveyed cite cash flow management as their primary reason for using the service.
Whereas for many, BNPL is a convenient, frictionless alternative to traditional installment loans or using a credit card, it can serve as a safety valve for those in more vulnerable economic straits. Such households may leverage the service only when under financial stress (3.6% of survey respondents stated they used BNPL for a “financial emergency.”) In addition, one in seven millennials report using BNPL to purchase groceries.
Merchants love BNPL, too. Anything that encourages shoppers to make a purchase today benefits retailers, and BNPL has been shown to increase sales conversion rates, raise average order values and increase new and repeat customers.
The popularity of BNPL services offered by fintechs like Klarna and Affirm is driving big tech to enter the field with their own offerings, most notably Apple and Google.
Apple piloted its new Apple Pay Later service in March 2023, then expanded it to all Apple Pay users in October. The service can be used to make purchases ranging from $75 to $1,000 on an iPhone or iPad and must be paid back in four equal payments over six weeks, without interest or fees. Google is launching its own competing service, offered through partnerships with Affirm and Zip.
Risks for Members and Credit Unions
BNPL’s transcendent popularity is accompanied by a certain amount of risk for both consumers and issuers.
Credit card debt ballooned in 2023, reaching $1 trillion for the first time. Delinquencies and charge-offs are starting to rise after years of below-average rates. Although a majority of these concerning data points have been generated through traditional revolving credit lines, BNPL is gaining share of wallet among vulnerable consumers, including those of the younger generations, in lower income households, the underbanked, and those with no credit or poor credit histories. Some experts fear that BNPL will only make bad financial situations worse for the most financially precarious populations.
The NCUA and other financial regulators are growing increasingly concerned with rising credit risks, which may eventually lead to more regulation of the BNPL arena. Such regulation could help to even the playing field between fintech providers like Klarna and Affirm and traditional card issuers. Consumer Financial Protection Bureau (CFPB) head Rohit Chopra testified before the Senate Banking Committee in December, stating the Bureau intends to create “basic consumer protection standards” for the service.
In its January 2024 Letter to Credit Unions (24-CU-01), NCUA cited credit risk as a supervisory priority for 2024. “Economic conditions continue to change the credit risk environment in the credit union industry, as inflation, high interest rates and borrowing costs, declining savings levels, and the end of pandemic-era stimulus and relief programs have negatively impacted some members’ ability to repay their debts. Credit unions’ loan portfolios expanded faster during 2022 than any year within the last 30 years, while aggregate loan performance began showing signs of deterioration in 2023.”
In addition, on its MyCreditUnion.gov website, the NCUA clearly lays out several risks that consumers may face when using BNPL, including “debt accumulation and overspending,” “lack of federal consumer protection,” missed opportunities for credit building,” and “hefty fees and credit damage.”
Credit Unions Can Do BNPL, Better
Credit unions have a window of opportunity to make a positive impact in the “Wild West” that is today’s BNPL landscape. But the window may not remain open for long, and cooperatives need to embrace the pay-later trend for what it is: a payment innovation, not simply another flavor of loan.
If you view BNPL as just another type of loan, it is all too easy to fall back into a business-as-usual mindset, featuring standard consumer underwriting practices, lengthy applications, Truth in Lending disclosures, and hard credit pulls. But the Klarnas of the world aren’t playing this game. They treat BNPL as a point-of-sale payment convenience, and as a way to reduce friction for the consumer at the very moment they decide to purchase a product or service. And merchants view it this way as well.
Although credit unions have fewer opportunities to insert themselves at the point of buying decision, they can still offer a compelling and valuable service to their members by utilizing post-purchase BNPL services..
By providing members with an installment payment service that is included with their credit or debit card, credit unions can actually help members improve their household budgeting and monthly cash flows.
Pay over time services allow members to take greater control of their spending, by empowering them to choose which purchases to pay back immediately, and which to defer and pay back in regular installments over a set period of time.
We are witnessing a fundamental change in consumer behavior. Borrowing is moving closer to the point of sale and is becoming inextricably linked with the payment experience. This is why BNPL is resonating with so many people want to be able to purchase the items they want, whenever and however they want.
This desire is fueling a convergence of lending and payments, with the eventual result being that the traditional personal loan may fall out of favor to the point of no longer being offered. For credit unions, this convergence is also driving a new definition of trust that is split between the traditional understanding that is defined more by “capabilities,” rather than “character” as their members increasingly expect these payment options and will look elsewhere to find them if not offered by their credit union.
Pay over time solutions are one way credit unions can drive innovation and meet members where they are today. BNPL programs represent a new way to activate and grow market share and net income. They increase the value of credit portfolios, leading to higher acquisition and retention rates—ultimately paving the way for the credit union to become or remain the member’s primary financial institution for daily interactions.
Credit unions are well-positioned to offer their own version of BNPL, but with the “credit union difference.” You know your members intimately and can offer solutions that fit their unique needs. Pay over time programs are an important way to enhance the trust you have built with your members, support their financial wellness and grow healthy member relationships for the long term.
To meet this market need, PSCU/Co-op Solutions is excited to offer a BNPL solution that empowers members with the control and flexibility to pay for select transactions over time, giving them peace of mind in support of their lifestyle and their financial wellness needs. For more information on this and other innovative digital payment solutions, contact your PSCU/Co-op Business Executive, call 800.782.9042, or email solutions@coop.org.