New Economic Realities   //   December 30, 2022

Growth and growing pains await buy now, pay later platforms in 2023

Buy now, pay later services continued to boom in 2022, adding as many as 28 million in new users from the year prior.

But heading into 2023, the nascent industry that’s yielded billions of dollars in spending is poised to see some growing pains. Major players Affirm, Klarna and Zip have yet to turn profitability even as the industry is projected to grow at a CAGR of 33.3% by 2026 to $596.7 billion, per Global Data.

BNPL services remain attractive to people who want the flexibility of spreading a purchase over time with zero or low fees, depending on the provider. Insider Intelligence says BNPL users grew from 50.6 million in 2021 to 79 million in 2022, with growth continuing but slowing to 88.2 million in 2023.

In turn, the companies are making more money, even if they’ve yet to turn a profit. Klarna in the third quarter saw $1.4 billion in revenue, a 22% year-over-year increase, and it’s operating losses dropped by $169 million quarter-over-quarter. Affirm saw a 69% year-over-year increase in the number of users to 14.7 million active consumers and a 34% increase in revenue to $362 million, yet still reported an adjusted operating loss of $19 million. The company says it aims to hit profitability by the start of the fiscal year 2024.

But the potential for customers to overextend themselves — especially amid inflationary pressures and a potential recessions — remains a concern. The Consumer Financial Protection Bureau has flagged inconsistent consumer protections, data harvest and debt accumulation as potential hazards.

All told, the budding sector is poised to undergo transformations next year. Here are a few trends to look out for.

Expanded purchase categories

Apparel, electronics and appliances are areas where BNPL has succeeded in drawing consumer purchases. But major providers are eyeing more verticals for 2023, hoping to tap spending in everyday categories like grocery, and big-ticket areas like travel.

Afterpay in November announced a partnership with Expedia that allows customers to split up payments for travel up to $2,000. Travel will continue to be “an area of investment” for the company in 2023, said Alex Fisher, Afterpay’s head of revenue for North America. So will “every day” spend, she said.

“Making sure that there’s an Afterpay offering where folks are transacting on a regular basis for the things they not only want but that they need is really, really important to us, and a demand that we’re fully dedicated to meeting,” Fisher said.

Affirm senior vice president of revenue Pat Suh said the brand is aiming for “ubiquity” in 2023, and becoming available across more e-commerce brands. It currently partners more than 245,000 merchants, 150% more than it did last year, and doubled its user base within a year.

Suh said the company will aim to woo new merchants to its network by providing a better customer experience and flexible payment options – like offering six-week to 60-month payment terms. It also plans to add more brand-specific promotions, such as a specific TV being offered with 0% financing at a big box retailer while the brand covers the interest.

She said this is particularly salient in a moment when costs of good are going up and brand margins may be decreasing.

“To offset that, instead of discounting those prices, they can provide financing, which still provides that affordability to the consumer and allows them to maintain their ability to convert the consumer,” Suh said.

An eye from regulators

In September, the CFPB released a report examining five BNPL firms that found a tenfold increase in their usage from 2019 to 2021. The services are “a close substitute for credit cards,” CFPB director Rohit Chopra said. In turn, the agency has said it will identify any guidance or rules that it can enforce to ensure BNPL providers provide baseline protections for consumers. It also says it will examine data practices, and address how the industry can develop appropriate and accurate credit reporting practices.

“With roughly $900 billion in outstanding credit card debt and Buy Now, Pay Later lending rapidly gaining share, the CFPB will continue to make sure that Buy Now, Pay Later is fair, transparent, and competitive,” Chopra said.

Despite the services’ popularity, vocal critics of BNPL say that the services target young users who are strapped for cash by partnering with trendy online brands. There’s also concern that young shoppers aren’t equipped financially to make good on their payments: The Ascent found in July 2022 the 33% of BNPL users overall have made a late payment or incurred a late fee. But the same was true of 48% of users aged between 18 to 24, the survey found.

Yet outwardly, some services are welcoming of these potential developments. Affirm’s Max Levchin said in the company’s first quarter earnings call that the report doesn’t change the company’s own road map and that it is cooperative with reporting efforts.

“Probably the most interesting material thing in their note is calling on the industry to essentially help consumers build their credit history and credit score though BNPL loans,” he said per a transcript. “We’ve been working pretty closely with the accredited reporting agencies and various other participants in the industry to help further that along.”

Claire Tassin, a retail and e-commerce analyst with Morning Consult, said the rapid growth of the sector comes with the catch of increased scrutiny. But for brands that sue BNPL, it may ultimately be a good thing.

“Retailers should support additional regulation here — with BNPL lenders drawing accusations of predatory practices, that’s not a good look for brand associations,” she wrote in a recent blog post.

Competition and consolidation

The boom of the BNPL has lured many new players to space. Banks are launching their own versions of BNPL services, and start-ups are looking to cater in niche industries. Yet major players like Klarna, Affirm and Zip are still working toward profitability.

Nandan Sheth, CEO of Splitit, a company that whitelabels payment installment plans for brands, anticipates seeing potential consolidation in the space.

“I think there is a point where the investors are going to find it difficult for these companies to continue to lose hundreds of millions, if not billions, of dollars. So I think there’ll be some consolidation in the space,” he said.

He sees his company as a competitor to these major players by allowing brands to have more ownership of BNPL services. For example, instead of having a third-party inserted into the checkout experience, customers would be presented with a financing option named for the same brand.

“Having two, three or four installment providers cluttering up the checkout line actually just confuses the consumer, and actually brings the consumer to a point where they have to make an extra decision,” Sheth said.

In turn, retailers are going to seek out a more “embedded experience,” he said.

“They’re gonna force and drive a brand neutral experience, where the brand that’s leading is the merchants brand, not the payments brand,” Sheth said.

Suh from Affirm said increased activity in the space is validating, but that Affirm has had “a 10-year head start.” It currently partners with about 60% of e-commerce brands, and five of the top 10 retailers.

“That’s a hard lead to overcome,” she said. “As we continue to invest in our technologies, our product, our network, the functionality, the features, and our marketplace, we really believe we’re pulling out ahead.”

Viewed as an alternative to credit cards

Consumers, meanwhile, are increasingly feeling the punch from inflation. Deloitte’s consumer tracker showing 42% of adults worldwide feel they’re worse off financially than they were this time last year.

Some experts predict this could create a perfect storm for taking on debt, whether its with credit or using BNPL plans. Chip West, director of category strategy for national sales at Vericast, said BNPL could become option for those looking to stretch their budgets and even woo new demographics.

“If we keep experiencing the issues and the impact that inflation is facing us with, this could potentially open the door for more utilization across different generational segments, like Boomers who have have really been the last group to really embrace (BNPL),” West said.

The Ascent found in July 2022 that 45% of BNPL users did so because the purchase otherwise wouldn’t fit in their budget. Meanwhile, 44% of people who don’t use BNPL say they use debit or cash instead.

In a moment where people may be using more of their savings and credit, though, BNPL providers can position their services as alternatives that don’t involve compounding fees.

Natalie McGrath, vice president of marketing for Afterpay, said Gen Z and Millennials have a “massive appetite” to move away from credit cards with high interest rates, which makes BNPL an appealing alternative.

“You open up credit card statements, mortgage statements, and you just see interest is just going through the roof,” McGrath said. “For anyone that’s conscious about managing their money more efficiently, buy now pay later is a product that just becomes incredibly scalable in these times.”

Still, in a moment when consumer debt has gone up by 15%, the potential for consumers to overextend themselves is a worrisome trend, West said.

“It’s just that there’s other avenues where consumers can take out debt,” he said. “We want to keep an eye on that for sure.”

BNPL for in-person shopping

In a move to segue BNPL to in-person purchases, Affirm rolled out its Debit+ card in June 2022. The card, which is linked to a customer’s bank account, can be used anywhere a Visa card is accepted and allows them to split purchases over $100.

Suh, who declined to share data about the card’s performance to date, said Affirm hopes to grow this service in 2023 as a way to make BNPL more convenient.

“Anything that brings familiarity to the consumer is always a good thing, where they don’t have to relearn how to use something,” Suh said.

Afterpay is also looking to bolster in-person shopping. For the holiday season, it marketed inside of busy shopping malls to direct shoppers to partner stores where they could use BNPL or get a promo code, Afterpay’s McGrath said.

“Building that seamless customer experience across all of our different retailers and all of our different partners is something that will also start to scale next year,” McGrath said.