5 pivotal buy now/pay later loan trends to watch

December 26, 2023 11:24 AM

When the adoption of buy now/pay later loans skyrocketed during the pandemic amid relatively low interest rates and lockdown-accelerated e-commerce shopping, one of the biggest unanswered questions was how these loans would fare when economic conditions shifted.

The verdict is in: BNPL loans are flourishing despite higher interest rates and inflation. Use of BNPL loans for online purchases on the Monday after Thanksgiving soared 42% over the same period last year, according to Adobe Analytics. If present trends continue, the estimated $2 billion U.S. BNPL market will expand at a compound annual rate of 31%, reaching $8.3 billion by 2028, according to ResearchAndMarkets.com.

The industry's ongoing success also fuels concerns. Consumer advocates worry that because most BNPL loans don't require a credit check or report the loans to credit bureaus, it creates blind spots around users' total credit exposure that could potentially put borrowers and other lenders at risk. For now, regulators have not crafted specific regulations for BNPL loans, but that may change soon.

BNPL is not a winner-takes-all market, said Larry Diamond, co-founder of the BNPL fintech Zip. "Sixty percent of consumers are living paycheck-to-paycheck, and BNPL loans provide an alternative way for people to budget their spending that feels simpler than a traditional credit card," he said.

Here's a closer look at some of the new trends and strategies BNPL lenders are using to stay relevant in the rapidly changing consumer finance landscape.

Google Pay, Apple Pay add BNPL options

Google Pay on laptop screen — Zip will be available within Google Pay for participating merchants beginning in January and Affirm will appear there at some point during the first quarter.

The channels where consumers can locate a BNPL loan offer are multiplying, including directly within the two biggest digital wallets, Apple Pay — which launched earlier in 2023 — and now Google Pay.

Beginning in January, Google Pay will also offer direct access to BNPL loans via Zip through participating merchants. Zip will be available within the Google Pay mobile wallet and on the websites of participating merchants that offer Google Pay at checkout, the companies said.

Zip is calling its effort a pilot, in which Zip's Pay in 4 loans will be available through merchants that offer Google Pay at checkout. When users check out through Google Pay, they will now see a banner they can tap to reveal a list of BNPL providers that will include Zip and/or Affirm.

"We're pursuing a multi-channel strategy, but we see this integration with Google as an extremely important collaboration that will significantly expand our reach because Google Pay has such a big service area," said Diamond of Zip, which launched in Australia in 2013. He is currently Zip's U.S. CEO.

Zip will continue to appear as a checkout option on individual merchants' websites and in stores, where it may be presented along with several other BNPL options. The overlap doesn't bother Diamond, who says Zip operates as a budgeting tool for many younger consumers who gravitate to using frequent, short-term loans they feel they can more easily control.

Affirm will also be available as a checkout option on the Google Pay mobile app and on Google Pay website checkouts, beginning sometime during the first quarter, Affirm said this month.

Apple Pay Later launched in the spring for a limited set of customers, and rolled out widely this fall. Consumers with a debit card enrolled in Apple Pay are invited through their Apple wallet to apply for a loan at the point of purchase. Apple Pay Later initially offers users loans of up to $1,000 on eligible purchases that are repayable in four payments, with no interest. Apple is financing the loans internally, and is the only major BNPL fintech that has vowed to report all activity to credit bureaus.

BNPL loans for specialized audiences

Citi window sign — Citi Pay and Citi Installments are Citigroup's new BNPL tool for smaller merchants, accessible to consumers through platforms like Shopify.

Traditional credit card issuers including American Express, Citigroup, U.S. Bank and others answered BNPL demand on one level by offering customers the opportunity to split purchases into lower-interest installments after the purchase. But Citi recently added a new item to its BNPL menu by launching Citi Pay and Citi Installment Loans, which operate outside of its traditional credit cards. The products bring Citi's deep credit underwriting engines and expertise to smaller merchants selling big-ticket items like home improvement, jewelry and personal watercraft.

To bring Citi Pay to smaller and midsize merchants, the financial giant has teamed with third-party merchant selling platforms Shopify, ChargeAfter and FreedomPay, where shoppers will see the Citi Pay logo at checkouts of smaller merchants which are adding the loan options via application programming interfaces or software development kits.

Block-owned Square is also seeing success from pushing BNPL loans out to its sellers through its Afterpay unit. Square saw a 47% increase in transactions through Afterpay over the five days between Nov. 23 and Nov. 27, 2023, compared with the same period a year ago, helped by a recent restructuring of Afterpay within Block, the company said.

Affirm recently expanded its partnership with Amazon, in which Affirm will offer BNPL loans at the point of sale for Amazon Business, a business-to-business marketplace. Merchants may register by providing their business name and address, with approval taking place within a few seconds at checkout.

Fine-tuning risks, adding revenue streams

Klarna spliting up.jpg — Klarna, Zip, Afterpay and Affirm all offer debit cards that can be used for everyday purchases as well as qualifying for BNPL loans in stores.

In the last 18 months, leading BNPL fintechs have tweaked their business models as conditions shifted. Most tightened their underwriting criteria when consumer account delinquencies ticked up last year, and many rely on alternative data streams and bank-account data to assess borrowers' real-time risk, according to Kevin King, vice president of credit risk at LexisNexis Risk Solutions, which supplies BNPL firms with data to inform underwriting decisions. These firms have long used AI and machine learning to pinpoint potential borrowers' risk, he said.

Other new twists include offering consumers a BNPL-branded debit card that provides insight into borrowers' spending habits. Affirm's Visa debit card, launched this year through Evolve Bank & Trust, had more than 500,000 users as of October.

The Klarna Visa card rolled out in 2022, issued by Salt Lake City-based WebBank. It carries a $4.99 monthly fee for access to 0% installment loans that must be repaid biweekly, and there is a $7 fee for late payments. The Afterpay Plus Visa Card, issued by Sutton Bank, costs $5.99 a month to maintain access to a credit line based on spending patterns. The Zip Pay Anywhere Visa card, issued through WebBank, has been available since 2021. In general, BNPL lenders' late fees range from $1 to $15 and are sometimes capped at 25% of the purchase value, according to NerdWallet.

A growing number of BNPL loans also offer extended terms for repayment that can stretch for up to 60 months, with interest rates up to 36%. Affirm, which has been offering longer-term loans since its launch in 2012, reports some of this borrowing activity to Experian. Currently about one in 10 BNPL loans carry an interest rate, according to Consumer Reports' research.

White-label BNPL options on the rise

U.S. Bank is using its Elavon merchant services unit to push out BNPL loan capabilities to consumers at the point of sale.

Citizens Bank, Synchrony and Bread Financial all offer white-label installment loan products with a wide range of repayment options and interest rates that build on long-standing promotional loan programs. These lenders are now refining their white-label approaches to meet merchants' evolving needs.

U.S. Bank in November added a new BNPL option called Avvance, which the bank's merchant services subsidiary Elavon is pushing out at the point of sale. The service enables consumers to enter their name and address at checkout and receive a BNPL loan decision within a few seconds.

In another expanding approach to white-labeling BNPL services, FedFinancial Federal Credit Union in Silver Spring, Maryland, this month announced the rollout of SpendFlex, a BNPL option offered to customers through online banking. Working with equipifi, a Scottsdale-based fintech that provides debit card issuers with white-label BNPL options, FedFinancial FCU will enable users to view SpendFlex BNPL offers from merchants and access them within seconds.

Regulation is coming … someday

The Consumer Financial Protection Bureau said it is planning to introduce basic consumer protections for BNPL users.

Samuel Corum/Bloomberg

BNPL loans have managed to escape the long arm of regulation so far because many of these products are marketed as Pay in 4 loans designed to be repaid in fewer than five installments. Such loans aren't subject to Truth in Lending Act requirements, so they're not required to report consumer loan activity to the major credit bureaus.

Consumer Reports issued a study in 2023 suggesting that the growing mass of BNPL users creates uncertainty in the overall consumer financial ecosystem. The ease of qualifying for multiple BNPL loans means some consumers could get in over their heads and face a cluster of late fees, or rack up so much debt from BNPL loans that they're unable to meet other financial obligations.

Other research conducted by the Federal Reserve Bank of New York in 2023 indicated that BNPL loans expand financial inclusion for many consumers who use the products to smooth out debt payments at a lower cost than traditional loans.

The Office of the Comptroller of the Currency early this month issued a bulletin warning banks to be aware of the higher risks BNPL loans add to the financial ecosystem.

The Consumer Financial Protection Bureau is keeping a close eye on BNPL loans. In late 2021, the agency announced an extensive market inquiry examining the business practices of BNPL lenders Affirm, Klarna, Afterpay, Zip and PayPal, and in 2022 it produced a report suggesting that guardrails would be forthcoming. Testifying before the Senate Banking Committee in late November, CFPB Director Rohit Chopra said the CFPB is developing basic BNPL consumer protection standards, but he provided no timeline for action.