We explore the risks and opportunities facing the North American payment industry’s most recent evolution – the ‘buy now, pay later’ model – and how it is impacting increasingly dependent consumers across the US.
FINANCIAL RISK OR SHORT-TERM LIFELINE
As the e-commerce landscape continues to grow exponentially across North America, the emergence of ‘buy now, pay later’ (BNPL) has been a major contributor to the online retail market boom and become a central component of the region’s evolving FinTech landscape.
Indeed, more than 25 percent of US consumers utilize the short-term loan installment initiative to finance their purchases, only paying for a small portion of the price at the checkout and spreading the subsequent cost in a series of low-interest or interest-free installments.
BNPL models are predominantly used across e-commerce platforms by young adults, with 41 percent of users in 2024 being between the ages of 16 and 24, marking a change in the purchasing patterns of future generations and the ways financial transactions are completed.
AN INCREASINGLY SHORT-TERM SOLUTION
The early foundations of the BNPL model initially surfaced in the late 19th century when installment plans would be implemented for expensive purchases, meaning more consumers could gain access to larger commodities.
Fast-forward to the early 2000s, and significant socioeconomic events such as the financial crash in 2008 caused major unemployment among younger generations in the US, who became more aware of staggering debt and the challenges associated with credit cards.
The BNPL model was subsequently marketed to this same demographic, who believed that such services were more risk-averse than the likes of loan sharks and high-interest credit lenders.
Corresponding with the growth of online retail and the inception of the e-commerce sector, major FinTech and digital entities spearheaded the installment payment process that has now taken off across North America and worldwide, seeing marked expansion in the 2010s.
Major players include Swedish-owned Klarna, Australian tech company Afterpay, UK-owned Clearpay, and the largest US BNPL financier, Affirm, which are having a major impact on the financial market.
With the global rise in the cost-of-living, long-term ramifications of the COVID-19 pandemic, and increasing use of e-commerce, BNPL platforms seem all the more appealing for US consumers.
This is demonstrated by the fact that more shoppers are utilizing the model for everyday items like clothes, groceries, electronics, and in restaurants – a far cry from the high expense items for which BNPL platforms were originally intended.
A WOLF IN SHEEP’S CLOTHING
The BNPL model is viewed as advantageous for consumers as it is a viable alternative to credit cards, with the spectrum of installment plans available ranging from six weeks to 36 months.
However, as the financial landscape begins to see the long-term consequences of BNPL platforms, it is becoming increasingly apparent that the model could create noticeable debt distortions, particularly when it is overused, leading to consumer stress.
Regarding the latter, due to elevated inflation costs from recent geopolitical instability in the US – which coincides with slow income growth – consumers can expect to be even more financially stretched.
Despite garnering significant profitability from retailer fees, BNPL platforms have also faced considerable challenges, as online transactions are typically not reported to credit bureaus while retailers shift the credit risk to BNPL platforms, causing long-term profitability issues.
Along with high operating costs, increasing funding, and technology expenses, and the growing number of users who continue to default on their loan repayments, the BNPL model has faced serious difficulty in recent years.
As a result, companies such as Klarna and Afterpay have faced serious difficulties. Having enjoyed unicorn status for many years, the former’s valuation has fallen 69 percent, devaluing from $45.6 billion at its peak in 2021 to its most recent valuation of $14 billion.
Klarna has cited one of the primary contributors to this loss being its expansion into US markets and has since not reported an annual profit since 2018.
To tackle this growing obstacle, Klarna has adjusted its financial decision-making and diversified its revenue stream through a combination of advertisements and consumer features to be a more stable FinTech organization and has since reported steady progress.
UNTAPPED POTENTIAL
Despite their instability thus far, BNPL platforms also represent key evolutions in the payment sector and FinTech industry more broadly.
If delivered correctly, the model can be of significant value to millions of Americans, with approximately 86.5 million people utilizing BNPL services in 2024.
Emerging among major FinTech players, other banking institutions have the opportunity to expand into the payment solutions and short-term loans sector through specialist consumer and corporate credit cards.
Unlike other BNPL organizations that lack thorough credit checks and aren’t as extensively regulated, banks have a greater understanding of customers’ financial health and associated risks.
Banks can therefore use this understanding alongside their pre-existing lending infrastructure to evolve BNPL models in such a way that they can become unilaterally advantageous for both consumers and financial institutions, forging a stable path in the BNPL market.
This article was produced by the editorial team at North America Outlook and published as part of the Outlook Publishing global network of B2B industry magazines.
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