Over the past few years, the Buy Now, Pay Later (BNPL) market has grown significantly – a report released earlier in 2022 projected BNPL to account for 9% of all North American ecommerce transactions and 12% of all European ecommerce transactions by 2025. Further, parts of the global BNPL landscape have started to show signs of maturation with the development of vertical-specific BNPL offerings, the acquisition of smaller BNPL players by those with greater market share, and the increasing popularity of white-labelled BNPL solutions by some retailers. With these trends in mind, considerable media focus has been directed toward the evaluation of BNPL as a usurper of credit cards, or as the new ‘credit card’ of younger generations of consumers. But the true threat BNPL represents to credit cards as a payment method has only been minimally explored beyond vague assumptions and alarmist claims. Thus, the goal of this article is to examine the attractiveness of BNPL as an alternative to credit cards, as well as the extent to which BNPL has been truly embraced as a substitute by consumers.
BNPL shares characteristics with many popular payment methods. The most salient example is the credit card, another way of buying goods at checkout while delaying payment. A common comparison is also often made to layaway, and to general plans allowing consumers to pay larger balances in a smaller number of instalments.
Despite these commonalities in structure, the rise and popularity of BNPL – exacerbated by the financial crisis in the mid-2000s as well as the more recent COVID-19 pandemic – seems to be attributable to its unique traits, rather than those it shares with other payment methods. For example, one thing many BNPL companies highlight is the lack of interest attached to their payment plans, as a key justification for using BNPL over credit cards to consumers. This has been a largely successful strategy. Even if BNPL loans represent a risk to consumers who may be more likely to shop impulsively, an analysis by the Kansas City Federal Reserve in 2021, which compared the cost of a USD 500 purchase across three different payment methods (i.e., BNPL, a credit card with an APR of 17%, and layaway with a service fee of USD 5) found that BNPL is often the least expensive of the three methods of payment (assuming on-time repayment of the loan by the consumer). For those who have done the math, this may be one reason they are drawn to BNPL loans. The lure of an interest-free deferred payment option in and of itself may still be attractive for those hoping to avoid longer-term debt. In a recent TSG survey of over 500 US consumers, from a lengthy list of potential product features, 82% of consumers selected ‘no interest’ as the most important consideration to them when choosing a BNPL offering.
Beyond the draw of a no-interest deferred payment option, emerging evidence suggests that some psychological factors prime consumers to respond favourably to BNPL loans. A study conducted in Australia in 2021 comparing the amount of money spent by consumers utilising credit cards vs. cash vs. BNPL reported that consumers spent more on BNPL, since the amount of money spent felt smaller to them when split across several payments compared to paying for a purchase up-front. Higher checkout tickets have also been highlighted by some companies as a selling point to merchants. One article from Klarna noted average order values were approximately 45% higher for retailers offering a BNPL checkout option, and Afterpay (purchased by Square in early 2022) currently reports a 40% increase in average order value for customers using BNPL.
The user-friendliness of some BNPL offerings and how they combine seamlessly with consumers’ phones as shopping apps (e.g., Klarna, Afterpay) or add-ons to digital wallets they may already be using (e.g., PayPal’s Pay in 4, Grab PayLater) is another factor that differentiates BNPL from credit cards. Namely, credit cards – while simple to use once an individual has obtained one – require underwriting, a credit check, and often a waiting period. BNPL apps can approve a consumer for use in seconds, typically require only basic personal details, and are often already well-integrated into consumers’ online shopping ecosystems. This can make them faster and easier to use than credit cards in many cases.
The attention BNPL has received as the new ‘credit card’ is not unfounded, as some BNPL offerings can be highly appealing (one consumer survey conducted in 2021 found that 62% of respondents who were using BNPL felt it could replace their credit cards) and evidence shows that many consumers use BNPL repeatedly, rather than as a one-off payment method. Data from a recent TSG survey also found that 80% of BNPL users agreed that BNPL was a better option over credit cards when making a large purchase, and a study by Affirm found that 68% of Millennials will not make an online purchase without a ‘pay later’ option. Despite consumer demand, the rise in fraud complaints received by the Consumer Financial Protection Bureau over the past three years about leading BNPL companies, as well as concerns over the BNPL business model, bad debts, and heavy operating losses reported in 2021 from Klarna, Affirm, Afterpay, and Zip are causes for concern when it comes to the long-term viability of BNPL as a payment method. But at least for now, BNPL can and is being used by consumers both to augment and as a replacement for credit cards.
This article was first published in Payment Methods Report 2022, the most updated overview of trends and developments in the payment methods space and the innovative technologies that these methods work upon, emerging consumers habits, and strategies on how to win at conversion and retention.
Sheridan Trent has a Master of Arts Degree in Industrial-Organizational Psychology – as a Senior Research Analyst at TSG (The Strawhecker Group), she uses her skills to conduct industry surveys, market research, and explore emerging trends in the payment industry.
About TSG (The Strawhecker Group)
TSG (The Strawhecker Group) is a globally recognized analytics and consulting firm that supports the entire payments ecosystem, serving over 1,000 clients from Fortune 500 leaders to more than a dozen of the world's most valuable brands. Trusted by industry leaders, TSG's strategic services, market intelligence, and analytics merge to empower clients with actionable and accessible information.
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