Initially touted as the credit card killer, buy now pay later (BNPL) is likely here for the long run. This popular payment method is the exact alternative to credit cards and offers consumers an additional financing solution.
Globally, the BNPL market was valued at $90.69 billion in 2020 and it was projected to grow to a whopping $3.98 trillion over the next decade. The pandemic largely contributed to its growth, with consumers often using the payment method to purchase more costly household and general items. Data compiled by Cornerstone Advisors shows that the adoption of BNPL between 2019 and 2021 was mainly driven by a younger demographic, namely Gen Z, or people aged between 21 and 25 years, and Millennials, aged between 26 and 40, who were considered to be the main targets of this payment method.
Although these two demographic cohorts saw the highest adoption rates, from 6 percent to 36 percent for Gen Z and 17 percent to 41 percent for Millennials, the use of BNPL by Gen X (41-55) and Baby Boomers (56-75) also increased significantly from 9 percent to 30 percent and from 1 percent to 18 percent, respectively, between 2019 and 2021.
For retailers, this payment method held the promise that shoppers would spend more and clear their online carts faster – with BNPL players claiming checkout conversion rates being amped up by between 20 percent and 30 percent.
BNPL as an alternative, favourable solution to retailers.
In addition to being an alternative payment solution, BNPL can also be used as an essential market instrument for retailers – with major providers such as Klarna promoting partner brands via its app and newsletter. The Swedish fintech company would only take a low cut from any leads generated.
But while BNPL has mostly benefited consumers and retailers, there are concerns over potential negative impacts. The biggest concern involves consumer protection, with many users having shown a tendency to purchase more than what they can afford. Regulating BNPL had been proposed in the past but difficulties arose on how to balance the demands of consumers and retailers as stricter measures may discourage people from using this payment method. Regardless, BNPL remains a favourite tool for retailers to grow, both ad and revenue-wise – and some are more than willing to pay BNPL providers up to 6 percent per transaction – roughly double the fee to process credit card transactions – to boost business expansion.
It is no secret that younger people – BNPL's primary targets – are seen as purchase-ready consumers, with seemingly less robust finances. However, they are still hungry for payment alternatives other than credit cards to access products. BNPL providers bridge this gap by introducing an interest-free offering and interest-based instalments, which break out payments for more expensive products over a longer period. This not only makes such products more accessible but also more digestible for a wider range of consumers.
Otherwise, expensive purchases are nearly inaccessible through traditional means of payment for lower-income earners, further limiting purchases to higher-end consumers or big spenders.
BNPL providers are also allowing retailers to not only get their items sold faster but also access a wider market. Hence, some retailers are more than willing to spend double for BNPL than what they pay to process credit card transactions. The idea behind BNPL is a more accessible way to pay. A breakdown price of items is much more appealing for consumers looking to make purchases on a retailer's website.