The Rise of Buy Now, Pay Later

The level of US debt recently rose above the $29 trillion level, and it won’t be long before it exceeds $30 trillion. As the US central bank prepares to increase short-term interest rates in 2022, each twenty-five-basis point hike will cost an additional $75 billion in annual debt servicing. The price tag for the future is staggering.

Governments can increase debt levels to their heart’s content; individuals do not have the same privilege. However, a group of payments companies is working hard to boost the levels of personal debt with “buy now and pay later” products. While attractive to many prudent consumers, these products could sow the seeds of the next financial crisis.

Buy now pay later is a growing business

• BNPL could make up 10% of all eCommerce volume by 2024.
• Customers using BNPL cite flexibility, budgeting, and affordability as reasons for buying now and paying later.
• 7% of shoppers said they would use BNPL for 2021 holiday purchases. Salesforce data saw a 29% year-over-year jump in BNPL globally during Cyber week from November 23 through the Monday after the Thanksgiving holiday.
• Demographics point to more adoption by younger shoppers.
• BNPL is a fast-growing payment method globally.

Companies in the BNPL market

• Square (SQ) changed its name to Block and is a leader.
• PayPal (PYPL) is a top-tier payments company offering BNPL services.
• Afterpay Ltd. ADR (AFTPY), Zip previously Quadplay, Affirm, and Seezle are leading companies in the BNPL sector.
• Smaller players include Splitit, Openpay, and Laybuy.

Partnerships and acquisitions

• Zip has partnered with Microsoft, Fanatics, GameStop, and Newegg in the US and is processing over $10 million in payments to over ten million worldwide customers.
• Affirm partnered with Amazon (AMZN) in August, allowing customers to split purchases of $50 pore more into smaller monthly installments. Affirm also works with Peloton (PTON) and Walmart (WMT)
• Block (SQ) bought Afterpay for $29 billion in August 2021.
• PayPal (PYPL) announced it would buy Japanese fintech company Paidy for $2.7 billion in September 2021.

Danger ahead? Memories of 2008

• Government debt is at unprecedented levels as the US debt is approaching the $30 trillion level.
• BNPL has grown to a $100 billion business
• BNPL companies charge merchants from 2% to 8% of the purchase amount. They generate income from late payment fees and interest on longer-term installment plans. Higher merchant costs lead to higher consumer prices.
• Encouraging impulsive shoppers to spend more than they can afford increases personal debt.
• While BNPL is typically interest-free, some providers charge high late payment fees.
• Expect regulations to tighten around the business.
• The 2008 housing crisis came from overextended home buyers. As defaults rose, property values fell. However, the property was collateral for the loans.
• BNPL is a form of uncollateralized lending that increases overall consumer debt levels.
• Rising government and personal debt could pose future systemic risks.
• Meanwhile, BNPL looks set to take market share from traditional credit cards while encouraging spending that contributes to economic growth.