New Economic Realities   //   October 26, 2023

Amid inflation, BNPL’s growth is being driven repeat users

Illinois resident ​Kathleen Lythberg spent more than 30 years teaching thousands of elementary school students reading, writing and math. When she retired last summer, she anticipated being able to cover living expenses on her Social Security and retirement income — but she didn’t count on massive sustained inflation. 

Lythberg took a part-time job at a local grocery store, where she checks out customers who are frequently complaining about high prices. Most weeks, she works 24 hours, but sometimes she only gets 16 if there are new trainees on the schedule. 

“My bills don’t go down to 16 hours,” Lythberg siad. “I’ve still got the same amount of things to pay for, and it really puts me in a bind.”

This budgetary back-and-forth is what caused Lythberg to start using Buy Now Pay later platform Affirm to pay for high-ticket purchases in installments. “I’ve used it half a dozen times for things I’d call necessities,” like a new bed, she said. “One time I was short on cash for food and I went to Target and got $150 worth of food and paid with Affirm for it.” 

She said she likes the flexibility of being able to choose her payment plan, and the text message reminders when a payment is coming up. It’s become a budgeting tool that “I wish I would’ve known about years ago,” she said. 

Lythberg is far from alone in the number of customers that are using BNPL platforms to repeatedly cover expenses at a time of high inflation and increasing credit debt. The Federal Reserve Bank of New York said last month that credit card balances hit a record high of $1.03 trillion, with delinquency rates spiking from 3.35% to 5% year-over-year.

Over the past several years, BNPL programs have emerged as a digitally native credit card alternative, allowing shoppers to finance purchases without the threat of compound interest. Major platforms like Affirm, Afterpay and Klarna have grown their customer base and are expanding into new sectors, going from apparel and beauty to automotive and travel. Though the services are most accessible online, in-person transactions are becoming more common, with physical cards or digital wallet cards.

Multiple data points from the platforms themselves indicate that customers like Lychberg making repeat purchases are driving much of the current business. Affirm reports that 90% of its business last quarter came from repeat users, with an average of 3.9 transactions per customer. PayPal reports that three out of four of its Pay Later Millennial-aged customers — who may be most impacted by inflation due to their life stage — use the service repeatedly. Afterpay, in a recently commissioned study from Oxford University, found that nearly half its users used it more than once a month in the past year, and 61% said the service has helped them manage inflation.

Chip West, director of category sales at customer data firm Vericast, said that BNPL can be a useful alternative for shoppers trying to make a bigger purchase but don’t want to add to their credit card balance or are concerned about their credit score. 

“When the costs are high, inflation stresses the budget, this is really important to consumers, to have an alternative to pay,” West said. “It makes a ton of sense that they’re taking advantage of something already available to them.”

‘It becomes a very powerful budgeting and cash flow tool’

BNPL platforms continue to grow quickly, and are racking up billions of dollars in transactions amid sustained inflation. Affirm saw $5.5 billion in gross merchandise volume last quarter, a 25% year-over-year increase. Klarna turned profitable ahead of schedule, with growth in the U.S. driven by its partnership with Airbnb. Zip, which divested from certain markets in a bid to rightsize operations earlier this year, returned to profitability in the first quarter of 2024 and reported and 11% growth in transactions year-over-year.

Affirm’s head of product Vishal Kapoor attributes the sticky behavior of BNPL shoppers to the transparency of the installment plan, especially when compared to a compound interest credit card.

“Because we underwrite every single transaction and we assess risk, that helps consumers know exactly what they’re going to be repaying,” he said.  “And it becomes a very powerful budgeting and cash flow tool.”

Some of the repeat growth, Kapoor said, comes from customers who are using the service as a budgeting tool to manage increased prices.

“Once they have used it once, they want to keep using it in a responsible way,” Kapoor said.

Repeat purchasing, though, requires careful budgeting on the part of the shopper to ensure they’re not overextending themselves with future payments. The Consumer Financial Protection Bureau has found that borrows are more likely to also have other credit cards or student loans, and have higher levels of delinquencies. As Lychberg experienced, the model offers a way to buy something that otherwise a shopper might not be able to afford. And that’s a potential slippery slope to incurring debt that doesn’t have the same regulations as traditional banking mechanisms — though the CFPB is eyeing the potential for new protections.

On the platform’s side, ”Affirm only gives you loans we truly believe can be repaid,” Kapoor said. At its last earnings report, the 30+ day delinquency rate was 2.3%. That’s not counting loans from Peloton products, which peaked during the pandemic and now represent less than 2% of the business, and Pay in 4 loans, which is evaluated separately because it is a shorter-term product.

Overall, the delinquency rate is higher than it was in the 2020 and 2021 fiscal years when consumers were flush with cash, but lower year-over-year and in than the 2018 and 2019 fiscal years. 

Once customers get hooked on a particular BNPL service, platforms have differing ways of keeping them there. Kapoor said that expanding into new areas, like travel, caters to expressed demand from customers who want to Affirm for other areas of spending. Afterpay has a rewards program that gives out points for on-time payments that can be used for perks like delaying payments or early sales. Jinal Shah, CMO for Zip, said that the platform will offer exclusive sales for Zip users from its merchants.

“We are constantly testing cash back and rewards and other ways to provide more value to our customers,” Shah said.

But ultimately, the budgetary element is a draw for many users. Afterpay found in its recent economic impact report that nearly eight in 10 users said the service helped alleviate financial stress. Co-founder Nick Molnar attributes in part to how people can space out payments as a way to budget. There’s also far broader generational usage because of inflation.

“At a time when Americans feeling the rising costs of buying and borrowing, it is critical to have a variety of payment options at the checkout,” he said on a media release Tuesday.

But with growth comes more risk. Shah from Zip said the company sees “extremely high” repeat rates as inflation settles in. But to prevent overspending, Zip locks the account of anyone who misses a payment. And it offers one complimentary payment date change if someone needs to change their schedule. These safeguards help the company mitigate its own risk, Shah said. 

“We are not about increasing customers at the expense of bad behavior,” Shah said.