Record $18.5 Billion Holiday Spend Forecasted via Buy Now, Pay Later Services: Are You Ready?
By Arriana McLymore
NEW YORK (Multibagger) - The holiday season is upon us, and U.S. shoppers are expected to spend a record $18.5 billion using third-party Buy Now, Pay Later (BNPL) services in the last quarter of the year, according to Adobe (NASDAQ: ADBE) Analytics.
Surging Debt and BNPL Popularity
As American consumers grapple with increasing debt, spending on BNPL services is projected to surge by 11.4% over the holiday season compared to last year. BNPL services empower shoppers by allowing them to pay for items through monthly installments spread over periods as long as 36 months, although four-installment plans are most common.
Outpacing Traditional Spending Growth
The anticipated rise in BNPL spending surpasses the projected 8.4% increase in overall holiday spending, which could hit approximately $240.8 billion between Nov. 1 and Dec. 31. This means firms like Klarna, Afterpay, and Affirm will likely capture market share from traditional debit card payments, especially for electronics and beauty products.
The Debt Trap Warning
However, consumer watchdogs warn that using credit cards to cover BNPL payments can exacerbate debt issues. Delicia Hand from Consumer Reports highlights that if credit card balances aren't settled in full each month, users may incur additional interest charges on top of potential BNPL fees.
Alarming Debt Statistics
U.S. lenders' net charge-off rates for credit cards rose to 4.82% in Q2, the highest since 2011, according to the FDIC. The New York Fed's survey in August showed a 13.6% probability of loan delinquency in the next three months, spiking to 19.5% for those with annual incomes under $50,000.
BNPL and Credit Card Usage Insights
Nearly 10% of BNPL purchases are made via credit cards and automated clearing house transactions, states the Financial Technology Association, whose members include Zip and Klarna. However, BNPL delinquencies remain below 2%.
What’s Driving BNPL Purchases?
Affirm predicts a significant demand for electronics like cellphones, laptops, and headphones, as shoppers look to replace gadgets bought during the pandemic. Beauty products are also expected to be hot sellers. Affirm, which powers Shopify's BNPL service Shop Pay, limits credit card payments on most loans but allows them for Pay in 4 purchases and down payments.
BNPL Providers' Payment Policies
- Affirm: Restricts credit card payments for most loans but allows it for Pay in 4.
- Afterpay: Accepts Mastercard and Visa, but not other BNPL providers’ cards.
- Klarna: Accepts Visa, Discover, Maestro, and Mastercard but not for Klarna card purchases.
Regulatory Updates
In May, the U.S. Consumer Financial Protection Bureau (CFPB) introduced new requirements for BNPL lenders, including investigating consumer disputes and providing periodic billing statements. However, assessing a consumer's ability to repay a loan is not mandated.
American Express and BNPL Integration
American Express (NYSE: AXP) allows limited BNPL provider payments and offers its own BNPL service, Plan It, connected to its physical credit cards.
Breaking It Down: The Simple Analysis
What’s Happening?
- U.S. consumers are expected to spend a record $18.5 billion using BNPL services this holiday season.
- BNPL usage is growing faster than overall holiday spending.
Why Should You Care?
- Using BNPL can lead to increased debt, especially if payments are made with credit cards.
- Be cautious of interest charges and potential fees if you can't pay off your credit card balance in full each month.
- Regulatory changes aim to protect consumers but don't require lenders to check your ability to repay.
How Can It Affect You?
- If you’re considering BNPL, ensure you understand the terms and can manage the payments without additional debt stress.
- Consider your financial stability and avoid falling into a debt cycle that could affect your credit score and financial future.
Stay informed, shop wisely, and manage your finances to enjoy a debt-free holiday season!