Buy Now, Pay Later – Is It Winning Over Two Whole Generations?

Pawel Stezycki

Oct 13, 2021 • 9 min read
Youngsters shopping online

Buy now, pay later fintechs dominated the headlines with the surge of online shopping.

Today, they have a chance to become more than shiny apps that bypass usual fees.

If you think buy now, pay later (BNPL) is a new way to shop, you are wrong. Even our great-great-grandparents were familiar with it. In the 19th century, Singer Sewing Machines sold its products for "a dollar down, a dollar a week." Other manufacturers offered weekly or monthly installments on their products like furniture and farm equipment, and cars with the advent of automobiles in the 20th century. Credit cards eventually became the preferred means of deferring payment on smaller purchases.

Today, BNPL is one of the hottest market trends, attracting younger shoppers with seamless, deferred payment alternatives that bypass the usual fees. Although BNPL represents only a small portion of total online retail spending (1.6% in 2020), the industry is growing rapidly worldwide. The biggest players in the market include Klarna, Affirm, Afterpay, and PayPal.

Global BNPL revenue was $93 billion in 2020. According to Bloomberg Intelligence, it may exceed $181 billion in 2022, and experts estimate that BNPL will reach 10–15 times its current volume by 2025. Klarna alone has a $45.6 billion valuation and 90 million users, while Affirm’s market value has jumped to $29 billion after it teamed up with Amazon.

Why has BNPL become so popular and how does it attract young and money-conscious buyers? Let us explore what's causing such a surge among Millennials and Gen Z – and what this could potentially mean for the future of BNPL fintechs.

Buy now, pay later – reasons for popularity

Let us first answer the question of why we are experiencing the BNPL boom right now when the concept has been around for decades. There are two main reasons: the boom in e-commerce fueled by the Covid 19 pandemic, and the declining popularity of credit cards among Millennials and Gen Z.

The global pandemic and ongoing lockdowns have led to a surge in online shopping and have accelerated digital transformation. Many retailers have taken advantage of e-commerce opportunities and found ways to attract and retain customers online. BNPL has been one of the solutions to provide a better user experience and increase sales.

For example, Foot Locker, a major retailer of trainers, partnered with Klarna (North America) and Afterpay (Australia) in the second quarter of 2020. A few months later, the CEO of Foot Locker, Dick Johnson, said that Klarna was already one of the company's top three payment options.

According to C+R Research from 2021, 71% of customers say they made more online purchases during the pandemic. Among this group, 51% say they used the BNPL service. Of them, 45% use it frequently (at least once a month) and nearly half (47%) say they use it "most of the time" or every time they shop online. Clothing and electronics are the most common purchases, at over 40% each, followed by furniture (32%), appliances (29%), household goods (23%), and cosmetics (22%).

Millennials and Gen Z prefer buy now, pay later

BNPL is especially popular with the younger generations. In the US, 36% of BNPL users were under 25, while 41% of them were Millennials (26-40 years old). In the UK, data from the Financial Conduct Authority shows that 25% of BNPL users are aged 18–24 and half are aged 25-36.

For them, BNPL is becoming an attractive alternative to credit cards. According to C+R Research, 38% of respondents say that buy now, pay later services will eventually replace their credit cards, and more than half (56%) say they prefer BNPL for purchases compared to using credit cards. Reasons cited by users include ease of payments, more flexibility, no interest, and a simple approval process. A survey by Afterpay found that 42% of Gen Z and 69% of Millennial shoppers are more likely to purchase items if a BNPL service is offered.

This shift away from credit cards is seen as a larger trend – in Q3 2020, the number of new credit card accounts opened in the US dropped nearly 50% year-over-year. Now, credit card issuers themselves are getting into the BNPL market. Mastercard. just launched a "service that allows consumers to pay for online and in-store purchases in equal, interest-free installments.

The service will be available in markets in the United States, United Kingdom, and Australia. Visa collaborates with Four, an alternative credit and BNPL platform, and is testing its own program, Visa Installments, with select merchant partners who can experiment with the checkout options via APIs.

Read the interview with Philip Belamant, CEO and Founder of the BNPL solution Zilch.

The mission – win the generations

There's more to BNPL than shiny apps and seductive marketing. The Ascent survey shows that the top two reasons for using BNPL are to make purchases that would otherwise not fit into a user’s budget (45%) and to avoid credit card interest (37%).

The first of these reasons shows that BNPL is not just about impulse purchases and spending money for leisure. Rather, BNPL is used to bridge the gap between paychecks or to keep credit card debt low. The other reason seems to be an illustration of the words of Sebastian Siemiatkowski, the founder of Klarna, "Credit cards reward rich users who can pay them off and punish the less fortunate."

With an average credit card interest rate of over 15%, BNPL may be a better option. Here, only a soft credit check is required and more consumers stand a chance of getting approved.

To succeed in the future and retain Millennial and Gen Z customers, BNPL providers will need to do more than just offer an app that allows users to buy a must-have piece of clothing and pay it off in a few weeks. The real game will be to introduce new shopping habits and entice people with new product offerings:

  • Affirm, for example, already offers a savings account with 1.3% APR, no fees, and an optional automatic deposit. With Millennials and Gen Z making up more than half of Affirm's users, the company is looking to win over traditional banking services with simple, transparent ways to save.
  • Klarna has launched a customer rewards program, Vibe, which allows users to earn loyalty points and discounts. These initiatives show that BNPL companies are looking to build deeper and more ongoing relationships with consumers and create new savings, shopping, and spending habits.
  • Uplift offers an option of BNPL for flight tickets from United Airlines and Lufthansa, which indicates a trend for expansion into new commerce categories. In the future, BNPL providers can step into healthcare, entertainment, and events.

The downsides of buy now, pay later

BNPL has its opponents who argue that it is irresponsible to encourage consumers to take on debt they cannot afford. According to the data from the Cornerstone Advisors, 43% of BNPL users were late on their payments in the past two years. More than half had their credit card limit lowered in 2020, and 31% describe their financial situation as "problematic."

Some experts fear consumers may take on debt through multiple BNPL apps and then pay it off with credit cards. The Australian Securities and Investments Commission found that within a year, 15% of BNPL users had to take out another loan to make their payments, and one in five cut back on buying essentials.

The rapid growth of BNPL also means that regulators want to take a closer look and ensure that excessive borrowing to fund extravagances will not lead to financial hardship.

Conclusion

With e-commerce soaring amid the pandemic, BNPL fintechs have made their way into consumers' hearts and wallets. Seamless and interest-free deferred payment has turned out to be exactly what digital natives have been looking for. Transparency, flexibility, and inclusion can indeed be more than just a trend. They can become a new way of creating a customer journey that has the side effect of boosting sales and consumption. Just like Singer’s installment selling did over 150 years ago.

The rapid growth and popularity with Millennials and Gen Z means that Klarna, Afterpay, and Affirm have the chance to become household names. They have proven that alleviating financial pressure is the key to success, but they need more ambitious goals to keep their customers.

If they create a financial ecosystem that people trust, they can help consumers not only spend their money more flexibly but also manage it more prudently. And by constantly adapting to changing customer expectations, they can truly win over two entire generations.

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Pawel Stezycki

Senior Innovation Consultant
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