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Looking Back on BNPL’s Roller-Coaster Ride

The “buy now, pay later” (BNPL) industry has been through quite the ride in 2022, reflecting the changing climate by which many consumers pay for their goods.

Top players like Afterpay, Affirm, Klarna, PayPal and Zip have all experienced elevated adoption at points throughout the year, but have also endured tanking valuations amid growth that hasn’t turned into profitability. And while consumers continue to rely on these platforms more, they are undergoing regulatory scrutiny due to potential risks for users—which include financial wellbeing and data privacy.

Despite an investigation into the sector opened by the Consumer Financial Protection Bureau (CFPB) in December 2021, the BNPL market was riding high going into 2022, and for good reason.

The end of the previous year saw the sector’s biggest acquisition, with Square (now Block) acquiring Afterpay for $29 billion. The same month that deal was announced, Affirm partnered up with Amazon—a strong indicator that buy now, pay later technologies were fully accepted into the mainstream. And another industry giant, Klarna, generated such gargantuan funding rounds that the fintech firm was valued at $45.6 billion entering the year.

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While the BNPL providers were in the clouds, they were also likely still feeling the aftereffects on an economy energized by stimulus spending. The stock market’s three major indices—the Dow Jones, the S&P 500 and the Nasdaq—all reached all-time highs to begin 2022 as more money was pumped into the economy.

Holiday retail sales reflected the high demand, jumping 14.1 percent to close 2021, according to The National Retail Federation (NRF). But BNPL saw an even bigger jump in usage, with payments provider ACI Worldwide saying transactions through the payments method increased from October to December 2021 increased 28 percent over the year prior.

Macroeconomic conditions depress BNPL valuations despite growth

But as inflation numbers continued to increase in 2022, both in the United States and abroad, the glee that started the year quickly turned to fretting. The stock market began to swoon as the Federal Reserve began raising interest rates to counteract the fast-growing inflation.

Market conditions since the first interest rate announcement have been especially unkind to high-growth tech companies that remain unprofitable—a bracket that every major installment payments provider still falls under.

For example, while Affirm saw revenue grow 34 percent year over year in the first quarter to $361.6 million, that number was a small dip to $364.1 million from the prior quarter. Net losses at Affirm totaled $251.3 million in the first quarter, and totaled $707.4 million in the prior fiscal year.

Klarna saw revenue in its most recent quarter come in at $1.4 billion, up 22 percent from the year prior with losses of $203.3 million. In its first three quarters of 2022, Klarna has incurred $797.1 million in net losses.

The lack of profitability is certainly a realistic concern for the industry—with Klarna laying off approximately 10 percent of its workforce this summer—but consumer demand is only going to continue for consumers who want to leverage the payments option, according to Jeff Tijssen, global head of the fintech practice at Bain & Company.

Soaring inflation has been significantly impacting consumers’ spending power, creating a consumer expenditure squeeze and increased demand for financing solutions to cover living expenses,” Tijssen told Sourcing Journal. “Rising inflationary pressure should drive up consumer demand for credit to fund rising living expenses, but it also adds additional pressure to consumers’ financial condition and can lead to increasing default risk.”

With fears of a potential recession running rampant, BNPL is appearing to be a draw for retailers that offer these services, according to a recent survey from software reviews platform Capterra. Of 349 shoppers surveyed, 66 percent of them saying they are more likely to shop at merchants that offer BNPL options.

As more adoption takes place, the concern now shifts to whether these inflationary pressures will impact consumers’ ability to make their repayments to BNPL providers. Affirm said that its 30-day delinquency rates were 2.7 percent in its first quarter, nearly doubling the 1.5 percent from the same quarter ending in September last year and up from 0.8 percent across 2021.

The CFPB is backing up these apprehensions about the sector at large, with the bureau saying that 10.5 percent of users paid fees for not repaying their loans on time in 2021, up from 7.8 percent the year prior. According to bureau director Rohit Chopra, public filings show that this upwards trend continued through the first half of 2022.

And 15.5 percent of borrowers closed last year having taken out five or more BNPL loans, up from 12.9 percent in the year prior, the CFPB discovered in its research—all before the inflationary issues even kicked in.

This “overextension,” Chopra called it, compounds the issues already seen in the credit card industry due to the sector’s nascency and general lack of oversight.

“Consumer reporting companies have been slow to develop mature credit reporting protocols with respect to buy now, pay later,” said Chopra in remarks on the bureau’s report on the sector. “Mortgage lenders and auto lenders have raised concerns to me that the growth of buy now, pay later with no associated credit reporting makes it more challenging to know whether a borrower can afford a mortgage or auto loan. The buy now, pay later firms themselves also may have no idea how many other loans a consumer may have with other buy now, pay later providers.”

2022 holiday shows more consumers are comfortable with BNPL

Nevertheless, government regulators haven’t slowed down shopper demand, particularly as the 2022 holiday season kicked into gear.

The peak holiday season brought the BNPL conversation back into the fold seemingly overnight, with Cyber Week orders via the alternative payments method rising 85 percent from the week prior, and revenue increasing 88 percent, according to data from Adobe Analytics.

A Pymnts survey of nearly 3,100 consumers on Black Friday indicated that 10.2 percent of shoppers used BNPL when paying online during the shopping event, up from 8.2 percent in the year prior. While that number still lags far behind credit cards (49.4 percent) and debit cards (47.7 percent), it is near in line with gift cards (10.9 percent) and continuing to grow.

Unsurprisingly, the growth in BNPL spending still happens to be driven by its youngest audiences. Research from the customer service technology company Bluedot in October suggested that millennials and Gen Z shoppers were turning to BNPL services more than other generations. Forty-eight percent of Gen Z survey respondents and 47 percent of millennials said they will use BNPL options to pay for their holiday purchases. And while four in 10 Gen X shoppers are using BNPL companies, only 14 percent of baby boomers said the same.

While adoption continues to increase, the top BNPL firms are likely going to have to keep innovating if they want to avoid being considered one-trick ponies. Tijssen told Sourcing Journal that BNPL providers cannot afford to simply stay in their lane as global headwinds potentially impact spending habits.

“In the current macroeconomic environment, BNPL players will need to adjust their business models, including funding sources, revenue mix and growth plans to achieve sustainable profitability,” Tijssen said. “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.”

The 2022 U.S. Buy Now, Pay Later Feature Demand report from Insider Intelligence indicates that consumers are feeling this way as well. Up to 56 percent of consumers said they are interested in earning rewards that don’t expire after making a payment with a BNPL platform. Earning rewards on every purchase (52 percent) and earning rewards for paying on time (52 percent) were other in-demand features.

As the year closes, the sector’s growth remains consistent, with Insider Intelligence forecasting BNPL payment value to reach $75 billion in 2022. This ultimately bodes well for the sector far beyond this holiday season. The market research firm said BNPL is growing by double digits each year and is still expected to reach $143.44 billion in 2026.