By Patti Murphy
The old checkout query "will that be cash or card," may be ready for an update to include buy now pay later? It's really not far-fetched. Buy now, pay later (BNPL) has been gaining in recent years, and this holiday season it's been on fire.
Adobe Analytics reported that online retailers rang up $7.3 billion in BNPL transactions between Nov. 1 and Nov. 26. In October, Adobe predicted online merchants would ring up a total of $17 billion in BNPL transactions this holiday season.
I'm not convinced the $17 billion prediction will be met. But then, $7.3 billion in a single month is big, although maybe not that much of a surprise given the current interest rate environment. Many of the big-name BNPL providers offer consumers the option to pay off purchases, at zero interest, and pay down the balance every two weeks.
During a presentation on BNPL a few years ago, a colleague leaned over and said to me, "I don't get it."
To which I explained, "It's going to be popular with folks who have thin or non-existent credit scores. It will give them the chance to spread out payments without blowing their weekly budgets."
She then asked, "But aren't they going to find themselves overextended and unable to make payments on time?"
I replied, "Well, yes, but then that's one way these companies make money." I answered quickly, not thinking through the potential problems.
(Another way these companies make money, of course, is by charging merchants a percentage of the ticket. Leading BNPL provider Affirm, for example, charges merchants between 4.29 percent and 8 percent, upfront. I suspect many of these are the same merchants who balk at paying 2 percent to 4 percent per transaction in card interchange. But that's a different discussion for a different day.)
An August 2023 survey by Motley Fool revealed that 35 percent of Americans had used BNPL during the previous 12 months. While that's down from 56 percent in 2021, the research suggested BNPL has appeal to at least some folks who probably shouldn't be making these commitments.
Nearly half the BNPL users surveyed (48 percent) admitted that they are turning to these plans to finance purchases that wouldn't otherwise fit their budgets. And it shows: better than one in four (26 percent) BNPL customers admit to having missed or made a payment late.
Motley Fool found BNPL is especially popular with younger Americans. The website's researchers found 50 percent of adults between the ages of 25 and 44 were using BNPL, compared to just 19 percent of those over the age of 54. I get it: the older one is the more rough economic times there are to remember; it makes older consumers think twice before overextending themselves with a new credit product.
As I explained to my colleague a few years ago, proponents of BNPL like to point out that it's a great credit product for underbanked consumers—those, for example, who may have an account at a financial institution but have thin or nonexistent credit files and can't obtain a credit card with a decent limit. This could be a problem.
That's because many of these folks are considered "financially fragile," to borrow a phrase from a recent study by the Federal Reserve Bank of New York. The New York Fed's researchers found a "disproportionate" number of BNPL loans are going to these financially fragile consumers.
Morning Consult has a similar take on the trend. Its research suggests the overwhelming majority of BNPL customers (69 percent) are Gen Z adults and Millennials, and most are unbanked (20 percent) or underbanked (47 percent). These individuals tend to be mid- to high-income individuals, Morning Consult's research shows, but they also tend to carry more debt than the general population. "The debt habits of BNPL users should serve as a warning sign to providers about their customers' financial health," the market research firm wrote in a recent report.
Findings of a recent survey by J.D. Power drive home the point. Thirty-two percent of consumers who were at risk of being unable to cover their basic financial needs had used BNPL in the previous 90 days, the firm said.
However, these consumers are not alone in using BNPL at the POS. In a report on its research, J.D. Power said nearly a quarter (23 percent) of well-healed consumers (those who said they had no difficulties covering their basic financial needs) also had used BNPL in the previous 90 days. "They appear to use BNPL to purchase out of preference rather than necessity," the firm wrote.
Consumers who are scraping by and those who are financially stable are drawn to the repayment terms and budgeting benefits, as well as the low-cost of using BNPL, J.D. Power explained. In fact, the firm found consumers from across the "financial health spectrum" are happy users of BNPL, and all are drawn by the same primary reason: "they like the repayment terms."
Still, there is considerable consternation around BNPL. The Consumer Financial Protection Bureau, not surprisingly, raised concerns over what it sees as inconsistent consumer protections and the risk of consumers getting overextended. Lawmakers have taken notice, too. In early November a House Financial Services subcommittee held a hearing on the risks and benefits of BNPL and other emerging fintech cash flow products.
The Credit Union National Association, a credit union trade group, was among those urging lawmakers to lay down some regulatory guardrails, like those credit unions and banks must operate within.
"CUNA remains concerned that the vast majority of BNPL providers remain unregulated and are increasingly engaged in financial activities by offering products intended to be glossy, tech-savvy alternatives to traditional loan products without adhering to the robust consumer protection laws and regulations in place for banks and credit unions," CUNA wrote in a statement to the subcommittee.
As we look to 2024, it's a safe bet we'll be hearing more from Congress and the CFPB on this topic. 
Patti Murphy, self-described payments maven of the fourth estate, is senior editor at The Green Sheet. She also co-hosts the Merchant Sales Podcast and is president of ProScribes Ink (www.proscribes.net).
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