Record Spending Expected on BNPL During Holiday Season

By Hannah Lang
(Reuters) – As Amazon (NASDAQ:AMZN)'s Prime Day kicked off the holiday shopping season this week, U.S. consumers are expected to spend a record $18.5 billion using buy now, pay later (BNPL) for purchases in the last quarter of the year, according to projections by data firm Adobe (NASDAQ:ADBE) Analytics.

Rise of BNPL

Buy now, pay later exploded in popularity as the COVID-19 pandemic forced more shoppers online, driving $75 billion in online spending in 2023, up 14.3% from 2022, according to Adobe.

BNPL providers like Affirm and Klarna boost shoppers' purchasing power by lending them money for purchases, which they repay in installments spread over as many as 36 months, although the most common plan is four-installment payments.

Most BNPL providers do not report their loans to credit reporting agencies, making comprehensive data on BNPL delinquencies scant. The Financial Technology Association states that less than 2% of loans from BNPL lenders are delinquent, compared to nearly 9% for credit cards.

However, 71% of BNPL users also had credit card debt in 2023, according to the Federal Reserve Bank of Boston.

Afterpay, owned by Block, reported that 96% of customers paid all installments on time in the fourth quarter of 2023, while Klarna reported similar on-time payment rates for its pay-in-four users.

For the three months ended Sept. 30, 2024, Affirm reported 2.4% of its loans were delinquent for more than 30 days.

BNPL Use in Online Spending

Consumers spent over $731.5 billion online from January through September this year, with $57.6 billion attributed to BNPL purchases. This marks an increase of 10.3% from the same period in 2023. Adobe predicts the record $18.5 billion in BNPL purchases in the last quarter would be an 11.4% increase year-on-year.

On-Time Payments and Risk Assessment

Most BNPL users make their payments on time, with fewer late payments reported between 2022 and 2023. However, the Philadelphia Fed noted uncertainty in whether this results from changes in underwriting methods or a shift in the BNPL user pool.

Impact on Credit Scores

In 2022, the U.S. Consumer Financial Protection Bureau reported most BNPL users with revolving credit card balances had subprime (580-619) or near-prime (620-659) credit scores. Many BNPL lenders do not furnish data to credit agencies, raising concerns about regulatory oversights.

In May, the CFPB mandated certain requirements for BNPL lenders, including investigating consumer disputes and issuing periodic billing statements. However, no requirements exist regarding a consumer’s ability to repay loans.

Average Monthly Payments

This year, 58% of BNPL users reported an average monthly payment of $100 or less. In contrast, Experian reported that the average monthly credit card payment was $202, with only 2% of BNPL users exceeding $1,000 in average monthly payments.

Generational Trends in BNPL Usage

According to PYMNTS, clothing was the most popular BNPL purchase among Generation X, Millennials, and Generation Z customers last year, while Baby Boomers tended to use BNPL for furniture purchases. Groceries were also a popular BNPL purchase across all generations, with a 434% increase in BNPL usage for everyday purchases like groceries and utilities since 2020.