More than half of consumers say BNPL is a valuable option in harder economic times, and in spite of new regulations and warnings, 65% are more likely to buy if your SMB offers it.
Buy now, pay later (BNPL) has become a popular and increasingly attractive option for consumers. For small and midsize businesses (SMBs), offering BNPL as a payment method can help you attract new customers, boost sales, improve your customer experience, and more. However, as the popularity of BNPL has grown, so has scrutiny from regulators.
This September, the Consumer Financial Protection Bureau (CFPB) published a report[1] that highlighted a number of risks for consumers who use buy now, pay later. Unlike more traditional forms of credit, BNPL plans do not carry as many financial safeguards. In light of this, the CFPB is set to issue regulations in the near future.
This key development in the BNPL landscape underscores the importance of understanding the consumer profile for businesses that are considering offering this payment option. To this end, Capterra’s 2022 Buy Now, Pay Later Survey* was conducted in November 2022 to gain insight from 349 consumers on their knowledge about BNPL risks, how they use these loans, and to see if the upcoming recession or holiday season will impact their decision to use this form of lending.
We’ll cover five trends that define the types of consumers who are interested in BNPL, such as how the recession might impact their spending, what plans they prefer, and more. Equipped with this information, you can thoughtfully offer this option to consumers with their best financial interest at heart.
/ Key findings
Businesses that offer a BNPL option can potentially increase revenue: 66% of respondents say they would be more likely to purchase from a business that has a BNPL option, while only 4% say they would be less likely to purchase from a business that offers BNPL.
Shoppers would be more inclined to use BNPL during a recession or the holiday season: 56% of respondents say they’d be more likely to use this financing option during uneasy economic times and 44% say they’d be more likely to use BNPL during the holiday season.
When informed about the CFPB’s upcoming regulations, consumers still favor BNPL: 57% of shoppers say they’re more likely to use the financing option in the future following the CFPB's report.
Risk factors such as hidden interest (71%), potential credit score damage (54%), consequential late fees (53%), and data privacy issues (51%) are important aspects that made shoppers pause when considering BNPL.
Consumers are confident they can make payments on time but almost half are in debt: Currently, 47% of BNPL users owe some amount to BNPL programs/are in debt, but 95% of shoppers are able to make their payments on time.
What is buy now, pay later? Buy now, pay later (BNPL), a form of short-term financing, blends the benefits of credit, short repayment terms, and app-based shopping, BNPL allows consumers to make a purchase and pay for it—usually in a series of four installments, typically without interest—at a future date.
Trend #1: Despite regulations and risks, BNPL remains attractive to shoppers
Even as the U.S slips into a forecasted recession, 56% of shoppers say they’d be more likely to use BNPL during uneasy economic times, compared to only 18% that say they’d be less likely. A majority of shoppers (57%) also note that they will be more likely to use BNPL in the future given the CFPB's upcoming regulatory actions.
Marketing for BNPL loans can often make them appear to be risk free and a zero-risk credit option, but as the CFPB’s report points out, these installment plans do not offer protections that are standard elsewhere in the consumer marketplace, they allow for data harvesting and the monetization of shopper’s data, and can push customers into overextension or debt.
Our research finds that the top three risk factors that are likely to influence consumers to shy away from BNPL usage include hidden interest (71%), credit score damage (54%), and late fees (53%). For most commonly used programs, late fees typically charge around ~$7 for missed payments, but interest rates can be staggeringly high—BNPL interest rates have similar rates to credit cards, which means APR can run up to 30%[2].
Trend #2: Shoppers are more likely to spend with your business if you offer BNPL
Despite the consequences BNPL plans can have on consumers’ finances, there are aspects of these programs that shoppers find enticing. In fact, 66% of respondents say they’d be more likely to purchase from a business that offers a BNPL plan, compared to only 4% that say they’d be less likely.
Leading draws for BNPL financing are no interest fees (83%), clear repayment structure (75%), and no late fees (65%). These elements underscore that SMBs that offer these plans must be transparent with terms and conditions and repayment plans.
Fortunately, more than two-thirds of consumers feel that businesses communicate the finer details of their BNPL programs clearly. Shoppers gravitate toward visiting a company’s website (41%) or checking out a third-party provider's website (32%) when seeking program specifics. Only 4% of respondents do not actively look for this information, so the proactive stance does nothing but benefit your business.
If you’re looking to work with a third-party provider, it’s important to consider the type of plan you’re offering your audience. The pay-in-four installment plan is emblematic of BNPL financing that doesn’t carry interest, but some providers offer plans for larger purchases that do contain interest with financing stretching up to 36 months. Depending on your partner, you can use other ways to educate shoppers about the right plan for them or to proactively detail financial consequences that come with late payments or plans that extend beyond the short-term.
PayPal, the most preferred third-party provider noted by respondents, enables businesses to send messages to shoppers to highlight the ideal BNPL option for them based on their price and region. Affirm will show consumers interest rates at the time of payment so they can make the best decision, and Afterpay promotes responsible spending by increasing payment limits when shoppers have a track record of paying off purchases.
Trend #3: Though most customers are not likely to miss payments, almost half are in debt
On the whole, 95% of respondents say they’re confident they’ll be able to make their BNPL payments on time. Given the apprehension over late fees and concerns over rising inflation, shoppers are also cognizant of their upcoming charges—only 26% say they’ve forgotten a payment was coming up, compared to 74% that have never forgotten an installment.
Consumers tend to gravitate toward using this financing option for smaller purchases.
However, even though purchases were mostly small, almost half of consumers are in debt – 47% say they owe money to their programs or are anywhere from less than $100 to up to more than $5,000 in debt.
Even though more than three-fourths of consumers have been able to pay back their debt, defaulting on a BNPL plan can:
Freeze an account
Negatively impact credit
Turn over a shopper’s debt to a debt collector
While these dangers can be alarming, there is a silver lining: Making on-time payments can be an alternative to a way to build credit history and credit score, as long as the BNPL program shares these activities with credit bureaus. Certain programs, for example, don't report payment history, but some providers offer payment options that include credit bureau reporting for those who opt into it.
You can choose providers accordingly to tactfully market BNPL installments as ways to build financial stability and history for your customers, provided you outline the risks via their terms and conditions and take steps to delineate what options are the best fit for your audience.
While not as widespread as no interest fees, some BNPL services, like Klarna, offer reward programs that encourage responsible spending and making on-time payments. These can be good ways to foster customer loyalty and retention. Sometimes these programs give members access to exclusive online and offline sales and shopping experiences, as well.
Trend #4: BNPL usage leans toward younger generations and minorities
BNPL installment plans are most used by younger generations. Within the past 12 months, 45% of Millennials, 33% of Gen Z, and 33% of Gen Xers financed at least one purchase using these programs. These age groups find BNPL programs attractive for a variety of reasons—they’re more likely to be tech savvy, particularly interested in flexibility and convenience in their shopping experiences, and are concerned about their financial situation.
Additionally, Black or African American (46%) and Hispanic/Latino communities (56%) were more likely to use this lending option at least once within the past year, compared to other demographics.
Only 4% of respondents say BNPL has had the biggest impact on their credit, compared to paying your bills on time (24%), using a credit card (24%), and taking out a personal loan (23%). And though more traditional forms of credit carry more weight when building one’s credit score, BNPL programs can be a double-edged sword because while they’re attractive options for the credit invisible to establish credit, the risks of missing BNPL payments carry more consequences than the benefits of making your installments on time.
Even in spite of the credit risks associated with BNPL, you can assist your communities and those impoverished or gated by traditional financial hurdles by offering BNPL programs that can help your customers build credit. Transparency cannot be emphasized enough when taking this approach.
Trend #5: Electronics, apparel, and beauty products are the most common purchases for customers
Shoppers typically spend less when using BNPL and they gravitate toward purchasing cheaper goods and services such as consumer electronics (27%), apparel and clothing (25%), or beauty products (12%). The uptick in online spending during the pandemic was especially advantageous for retailers that had to pivot due to brick-and-mortar shutdowns, as these goods easily translated into a digital marketplace.
Beyond retail, a minority of respondents note that they’ve used BNPL for auto repairs or vehicle sales (6%) and for healthcare (5%). For customers gridlocked by low income, no credit history, and other financial disadvantages, these loans are more accessible and generally require applicants to only undergo a soft credit check.
Given this context, buy now, pay later makes more sense if you’re in the retail business versus an industry that offers services with a higher price tag. However, it can be an empowering option for you if you're seeking to expand your customer base. Walnut, for instance, enables medical practices to approve more patients, especially those with credit challenges.
How to offer BNPL with your customers in mind
BNPL can boost your revenue, foster customer loyalty, increase conversion rates, and more. Not only are consumers more likely to spend with your business if you provide a BNPL option, but they enjoy the convenience, opportunities to build out a credit profile, and plans that shield them from interest and late fees. With this all in mind, here are some quick tips on how to provide BNPL while looking out for your shoppers:
Be as transparent as possible: Informing your customers about interest rates, average late fee costs, and how it can affect their credit is pivotal. Make terms and conditions clear on your website, during the online purchase journey, or at the point of sale.
Package in rewards programs: Encouraging responsible spending by rewarding your customers with special deals and other incentives can keep them out of debt and increase customer loyalty.
Help them build credit: Offering BNPL plans that can potentially build out their credit history can empower disenfranchised demographics and help them build a financial base.
Create a quick, personalized experience: Shoppers crave buyer journeys that are seamless and painless. Make sure your BNPL offering intuitively fits into your platform and that it leaves room for customers to personalize their interactions with your brand.
Finding the right software for your business
The CFPB’s upcoming regulations for BNPL programs, and the associated financial risks for consumers they’ve highlighted, mean that an ethical and customer-focused approach to implementation is pivotal if you're considering offering such plans.
Check out our payment processing directory to find a suitable BNPL plan that meets you and your customers' needs. Additionally, you can explore our latest report on the state of the accounting industry to see how financial software will be harnessed moving into 2023.