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BNPL Back In Vogue for Spending-Leery Shoppers

Despite possible U.S. federal regulation hanging over its head, the buy now, pay later (BNPL) space is seemingly heating up once again—just as the 2022 holiday season kicks into full gear.

During Cyber Week, buy now, pay later orders rose 85 percent compared to the week prior, with revenue generated from the alternative payments method increasing 88 percent, according to data from Adobe Analytics.

On an annual basis, the percentage of orders made BNPL was up 6 percent, according to Salesforce’s Cyber Week data. However, the average order value for BNPL decreased by 9 percent.

Like many of the sector’s tech contemporaries, BNPL’s increased adoption was overshadowed by declining valuations that impacted all of the major companies in the field. Year to date, Afterpay’s parent, Block (formerly Square), has seen its stock plummet more than 58 percent to $67.77. Affirm has seen a bigger dip of 82 percent to $13.92 per share, while Zip Co plunged even further at more than 85 percent to 44 cents per share. Klarna isn’t a public company in the U.S., but its valuation also plunged more than 85 percent from $45.6 billion in June 2021 to just $6.7 billion—even after securing another $800 million in financing.

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None of the major BNPL providers have reached break-even profitability.

But the news of the platforms’ usage throughout the holiday season is encouraging for the sector over the long haul, especially if consumers are turning to installment payments when they are spending the most money.

In one such example, Afterpay said that BNPL transactions through the platform from Nov. 21-27 grew 120 percent compared to sales across online and in-person from Oct. 1-7.

The categories purchased via BNPL range across food and beverage, which saw sales increase 251 percent from the pre-holiday period, to hardware, which drove 128 percent growth. Travel and experiences (57 percent growth), automotive (32 percent) and footwear (16 percent) were the next three-most purchased categories through these types of installment payments.

The wider usage of BNPL platforms comes as consumers have shared concerns about spending and the overall state of the economy throughout 2022.

Although inflation has eased in recent months from the 9.1 percent peak in June, with consumer prices up by 7.7 percent on a year-over-year basis in October, the annual Consumer Price Index (CPI) increase remains close its highest levels since the early 1980s.

“The strain that rising inflation puts on consumers’ budgets may lead more shoppers to seek out flexible payment options,” said Jordan McKee, fintech analyst, S&P Global Market Intelligence. “This may position BNPL, particularly services that offer interest-free installments, attractively.”

With holiday savings top of mind for consumers, Square and Afterpay found in a survey released in early November that at least one in six Americans had planned to use a BNPL service to budget their finances during the gift-giving period.

A similar study from payments trade association The Electronic Transactions Association (ETA) and payments consultancy The Strawhecker Group (TSG) pegged the expected use of BNPL during the holiday at 20 percent of shoppers, while another 20 percent were on the fence.

Budgeting has become more of a concern, according to the ETA/TSG study, indicating that 72 percent of respondents said they’re concerned about the affordability of gifts, compared with 61 percent who said the same last year.

“The general trend during financial downturns is that consumers have a tendency to want to spend the money they have, which is one of the factors why debit performed better than credit during the Great Recession and throughout much of the pandemic,” McKee said. “BNPL is seemingly positioned as a more consumer-friendly substitute for credit cards, which may position it as an attractive alternative.”

To balance additional spending, nearly half (44 percent) of the 1,500 consumers surveyed by Square and Afterpay looked to purchase an item if it was on sale, and 24 percent planned on canceling or stopping certain activities such as subscriptions.

McKee noted that as more adoption takes place, the concern now shifts to whether inflationary pressures will impact consumers’ ability to make their repayments to BNPL providers.

Citing a 2021 consumer survey from 451 Research, McKee said that one in five (20.9 percent) of Gen Z BNPL users, and over one in ten BNPL users overall (11.6 percent) indicate they are rarely or never on time with their repayments.

Jeff Tijssen, global head of the fintech practice at Bain & Company, warned that BNPL providers cannot rest on their laurels as economic conditions get worse, especially as more players in an already crowded field pop up.

“In the current macro-economic environment, BNPL players will need to adjust their business models, including funding sources, revenue mix and growth plans to achieve sustainable profitability,” Tijssen told Sourcing Journal. “The biggest BNPL platforms are so much more than BNPL these days, with other revenue lines and product strategies that complement BNPL. BNPL-only businesses may struggle to compete if they don’t diversify their business and differentiate their value proposition from what the bigger players offer.”