Buy Now, Pay Later (BNPL) will have to reckon with recovery / debt collection issues soon. BNPL is a young, but rapidly growing market with big appeal to Millennial and Gen Z consumers. Companies in BNPL market themselves as seamless shopping tools, but the product is really a credit agreement, which means that sooner or later it will face growing recovery, consumer preference, and debt collections considerations.
In this article, find out all about BNPL, its growth trajectory, its typical consumer, and why it matters for digital recovery / debt collections.
BNPL payment options are exactly what they sound like. The consumer makes a specific purchase now with a down payment, and then pays the remaining balance later. They are typically available online during checkout, and some of the common BNPL providers include: Affirm, Afterpay, Klarna, and PayPal.
It’s essentially a small loan to complete a single transaction.
Who are BNPL customers?
A lot of consumers - and many of them are younger consumers.
The BNPL market is still young, but expected to grow fast. Clearly, the largest BNPL lenders are already seeing significant growth. Afterpay financed over $9.8B in loans in North America during the second half of 2020, up 106 percent year-over-year, according to company disclosures. What's more, by Q4 2020, Afterpay had 8.1M active North American users, a year-over-year jump of 127 percent. Afterpay competitor Klarna operates in 45 countries, claims 147M active consumers and $80B in gross merchandise volume, according to the company's 2021 year-end investor report. Per corporate financial disclosures, Klarna reached 14M US consumers by the end of 2020, a year-over-year jump of 115 percent, and 25M US consumers in 2021, a 179 percent year-over-year jump.
And all that growth is concentrated in younger consumers. Around 80% of BNPL transactions are completed by consumers between the ages of 19 and 34, and 70% of all users of BNPL make $50,000 or less annually. Younger consumers are also less likely to view a BNPL balance as a form of debt, as opposed to an open line of credit or loan. In fact, 70% of Afterpay’s user base is in the 18-34 age range. And that market is growing fast. The Afterpay 2021 report on Millennials and Gen Z Spending notes that Gen Z BNLP spend is up 900% since January 2020.
The most common item purchased with a BNPL loan is clothing, and many users reported that they were using BNPL to purchase an item they would not typically be able to afford and/or to take advantage of seasonal sales. In fact, nearly half of the shoppers surveyed said they would not have completed their transaction if there had not been a BNPL option available at checkout.
How is BNPL different from a traditional credit card or loan?
Here are a few key differences that set BNPL apart from traditional loans or credit cards:
- There is typically an interest free period. (This is similar to introductory interest-free periods offered by some credit cards.)
- If consumers do not complete their payments as agreed, interest rates can be as high as 30%, whereas the average credit card interest rate for a person with "Fair" credit is 22.90% (as of Q4 2021).
- Payment schedules can vary. Traditional loans and credit cards expect a monthly payment, a BNPL transaction may require payments every two weeks.
- Companies offering BNPL loans make most of their money from fees they charge merchants for the use of their financing.
Using a BNPL loan to purchase a product is similar to a layaway agreement (though younger Millennials and Gen Z may not understand that comparison). The availability of a BNPL option at point-of-sale makes it attractive to consumers who are shopping online.
According to 38% of users, BNPL services "will eventually replace their credit cards, and more than half (56%) say they prefer Buy Now, Pay Later compared to using credit cards for purchases," according to a recent report from C+R Research.
Why do consumers like BNPL over credit cards? According to the same C+R Study, the top reasons are:
- It’s easier to make payments (45%)
- There’s more flexibility compared to credit cards (44%)
- The services offer little or no interest (36%)
- The approval process is easy (33%)
How does BNPL affect a consumer’s credit?
There is much that is still to-be-determined as it relates to consumer credit and BNPL.
Some lenders in the BNPL space conduct soft credit pulls when the consumer applies; some don’t. Most of the lenders don’t conduct a hard credit check. This makes using a BNPL payment option an attractive, easy option for consumers with no credit or poor credit.
Some lenders report missed payments to the credit bureaus; some don’t. It’s up to the consumer to understand the terms of their agreement.
One thing is clear, though. BNPL transactions don’t help improve or build credit for consumers, but they can hurt their credit. On-time payments are almost never reported to the credit bureaus, while late payments are sometimes reported.
Why does it matter in collections and recoveries?
Because BNPL is a rapidly growing credit market that will need to deal with recovery and receivables / collections issues sooner rather than later.
In 2019, the size of the BNPL marketplace was about 3 billion. It jumped 1200% in 2020 to 39 billion, and is projected to surpass 100 billion in 2024.
Many BNPL firms portray themselves as more humane, fundamentally different credit alternatives to more traditional forms of credit. Klarna recently argued that credit itself is not the problem because, after all, credit helps economies function and serve a social purpose, but rather that the problem is certain kinds of credit.
"High-cost credit, credit that encourages you to push debt forward indefinitely as well as tons of other poor practices by credit card companies, banks and other less serious actors really are a menace to society," the company noted.
This doesn't exempt BNPL from dealing with delinquency. Their customers are missing payments and dealing with credit score implications. Of the consumers using BNPL loans, 34% have found themselves behind at least one payment, and of those consumers reported that their credit score declined as a result. The average BNPL loan is for a relatively low amount of $149, and while most BNPL companies don’t charge interest if payments are made on time, late or missed payments can result in high fees for the consumer, and those balances can balloon.
BNPL could present an immense opportunity for downstream collections, but it will also present significant challenges. Since BNPL loans originate online, through a simple, friction-free process, it will be difficult to collect on this type of debt using traditional methods like phone calls and letters.
Companies hoping to capitalize on what may be a wave of BNPL debt will need to be prepared in ways like:
- A true customer service online portal. Since BNPL loans originate online and almost all servicing is completed online when the loans are current, it’s safe to say that once the accounts are delinquent or charged-off, consumers will expect the same type of service.
- Flexibility on payment terms. Many BNPL loans have repayment plans that are a traditional monthly payment, so companies hoping to collect this type of debt will have to get creative in terms of their payment plan offerings. This may mean changes to your payment portal, as well as training your representatives on flexibility.
- Choices when it comes to communication (channel
and time). Since these consumers are accustomed to self-service and any time transactions, having the ability to assist them with their accounts at any time will be key. Companies will need to offer chat, SMS, email, and automated assistance so that consumers can get what they need whenever they need it without having to staff a 24-7 call center.
Erin Kerr is the Director of Content for Collections & Recovery - a digital resource for collections strategy executives - and the Executive Director of the iA Innovation Council. She is a seasoned receivables management professional, with recent experience in digital strategy and a passion for crafting digital solutions for a better customer experience.