Wednesday, December 21, 2022
Buy now, pay later credit: User characteristics & effects on spending patterns, published by the National Bureau of Economic Research, shows how BNPL not only boosts spending at businesses offering the payment option, but also at other businesses, as well. And the spending boost continues for up to 24 weeks following a BNPL purchase.
The NBER is a nonprofit research organization based in Cambridge, Mass. The paper, authored by a pair of economists from Harvard Business School and an NBER economist, analyzes financial transaction data on 10 million active consumers between 2010 and 2021.
The analysis pointed to a "liquidity flypaper effect," the paper stated, where the increased liquidity created by a BNPL loan prods additional purchases of similar goods. "This flypaper effect would predict an immediate increase in the retail share of total expenditure and also an increase in non-BNPL spending," the economists wrote. "We also find that these increases in retail share persist after the immediate liquidity 'sticks'," they added.
The notion of paying for purchases over time is not new, but it has been gaining steam over the past few years, tracking overall growth in ecommerce. The Consumer Financial Protection Bureau estimated the BNPL loans grew more than tenfold between 2019 and 2021, from 17 million to 180 million loans by the five largest players in the market.
The 180 million BNPL loans totaled $24 billion, or about 2 percent of total credit card spending, according to the NBER analysis.
Research by Payments.com revealed that 10.2 percent of Black Friday shoppers used BNPL this year, up from 8.2 percent in 2021 and 3.7 percent in 2020.
Several companies offer BNPL, but the five largest providers are Affirm, Afterpay (owned by Block Inc.), Klarna, PayPal Holdings Inc. and Zip. Earlier this year, Apple got into the game, with Apple Pay Later. More recently, CNBC reported that Walmart is developing its own BNPL product that could be used at its stores and website, as well as other retailers.
Consumers are attracted to BNPL because it offers a way stretch payments for a purchase, generally at zero percent interest if the total is paid off within a set period, typically four to six weeks.
The CFPB expressed concerns that consumers may be unwittingly taking on too much debt with BNPL, which doesn't carry the same consumer protections as traditional credit products, like credit cards. And it suggested regulations are in the offing. The consumer watchdog agency has regulatory authority over nonbank providers and the largest bank providers of consumer credit products.
The website Statista reported that in June, 22 percent of BNPL users said they had fallen behind by one or more BNPL payments. That was up from 16 percent in June 2021. Among BNPL users surveyed this fall by Forbes, 57 percent indicated they have made late payments on BNPL purchases.
The Forbes survey, of 1,000 consumers who had taken out at least one BNPL loan, found a majority "plan to lean heavily on buy now pay later this holiday season." Nearly two out of three (64 percent) were planning to use BNPL to purchase gifts; 70 percent told Forbes they expected to spend more than planned because of BNPL.
The Forbes survey also found BNPL customers aren't necessarily using this short-term financing option just for big-ticket items; 30 percent said they would use BNPL to finance a purchase under $100. The average surveyed user was paying off three BNPL purchases at a time, Forbes reported. 
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