“Buy now, pay later” (BNPL) programs have become a popular form of consumer payment. It is a type of short-term financing that allows consumers to make purchases and pay for them in installments, typically interest-free. In practice, BNPL services typically offer “Pay in 4” programs, which divide a purchase into four equal installments, each due two weeks apart.
In the past few years, BNPL has seen rapid growth in adoption and usage. A September 2022 report from the Consumer Financial Protection Bureau (CFPB) showed that the number of BNPL loans originated in the U.S. by the five top lenders grew from 16.8 million in 2019 to 180 million in 2021, with the total loan values growing from $2 billion to $24.2 billion.1 A survey conducted by the New York Fed in October 2023 reported that 20 percent of consumers surveyed had used BNPL.2
Companies operating in the BNPL space are mostly fintech firms, such as PayPal, Afterpay, Affirm, Klarna, Zip and Sezzle. Revenue for providing BNPL services comes primarily from fees charged to merchants that accept BNPL. In addition, revenue may also be generated from late fees or penalties charged to consumers who fail to comply with the terms of repayment.
Merchant Adoption and Payment Efficiency
While BNPL products are new, they share similarities with existing installment payment options, such as layaway and credit cards. Unlike layaway, both BNPL and credit cards enable consumers to take immediate possession of goods and delay payments.
But comparing with credit cards, BNPL has some distinguishing features:
Rather than a revolving line of credit, BNPL products are structured as installment loans with a down payment due at sale and a fixed repayment schedule.
BNPL loans are offered through retailers and are tied to the purchase of a particular product.
BNPL companies often offer easier lending terms, with no or limited credit checks, zero interest, and no or limited negative reporting to credit bureaus.
The merchant fees charged by BNPL providers are often higher than the fees charged by credit card companies. The fact that merchants are willing to pay such fees suggests that merchants benefit from accepting BNPL. This is consistent with survey results showing that consumers spend more when using BNPL and that BNPL increases retail conversion rates and average ticket sizes for merchants.
The economics literature on price discrimination can shed light on merchants’ adoption of BNPL. One way to think of BNPL is that merchants use it to differentiate customers by price sensitivity. Merchants charge regular retail prices to customers who do not use BNPL (that is, higher-demand consumers, or those who are less price-sensitive) and provide a subsidy in the form of an interest-free short-term loan to customers who use BNPL (that is, lower-demand consumers, or those who are more price-sensitive). Because the subsidy allows merchants to make sales to customers who would not otherwise make a purchase, it increases merchant profit, consumer surplus and social welfare.
However, if merchants already serve both types of customers, introducing differentiated pricing like the BNPL would allow merchants to raise the retail price to high-demand customers while providing subsidies to low-demand customers. As a result, merchant profit increases, but low-demand customers benefit while high-demand customers lose, and the net effects on total consumer surplus and social welfare depend on specific consumer demand structures.
The above analysis suggests that merchants wanting to maximize the benefits of offering BNPL would use BNPL to target customer type accurately and to lower the BNPL service costs. However, because BNPL services are outsourced to third-party providers, these goals may not be met adequately.
For example, offering interest-free BNPL services excessively may shift existing customers away from payment options that cost merchants less to accept. The shifts in payments could eventually result in the costs of accepting BNPL outweighing the values and raise retail prices for everyone. Once consumers have widely adopted BNPL, merchants may not be able to discontinue accepting it, and the cost may not decline without regulatory intervention. Historically, these policy concerns have emerged alongside the growing adoption of payment cards and could extend to new payment methods like BNPL as well.
Consumer Financing and Protection
The rise of BNPL also raises concerns about consumer financing and protection. Consumers who use BNPL tend to have a riskier credit profile: They are typically younger and less-educated, with higher debt burdens and lower credit scores.
A June 2023 survey conducted by the New York Fed provides more details on consumers who were offered BNPL. The survey found that about 64 percent of respondents have ever been offered a BNPL payment option, while 19 percent (or 29 percent of those who have been offered BNPL) have used it in the past year.4 Respondents with these characteristics were offered BNPL more often:
These differences may reflect both the availability and possible targeting of BNPL.
The survey also shows great variability across groups in BNPL usage. The use of BNPL is higher for females, renters and individuals without a college degree, and its use monotonically decreases with income. Thus, while lower-income individuals are less likely to be offered BNPL, they are more likely to use it. Overall, respondents with lower credit scores and greater unmet credit needs make up a disproportionate share of all BNPL users.
Relatedly, a 2022 working paper provides a detailed look into the U.S. BNPL market by constructing a large panel of BNPL users from transaction-level data.5 It finds that BNPL access increases both total spending levels and the retail share in total spending, with magnitudes too large for standard intertemporal and static substitution effects to explain. The authors argue that the results are consistent with BNPL reducing consumer price elasticity on covered items, thus increasing near-term spending at the possible expense of longer-run liquidity. As a result, BNPL may increase the likelihood that consumers face negative outcomes resulting from low liquidity.
The 2022 CFPB report identified several risks for consumers using BNPL.6 These include:
Inconsistent consumer protections, such as a lack of standardized cost-of-credit disclosures and minimal dispute resolution rights
Data harvesting and monetization that may invade consumer privacy and increase market power concentration regarding consumer data
Debt accumulation and overextension, in which case BNPL induces some consumers to borrow more than they can repay
Following that, the CFPB has taken steps to address some of the risks, particularly inconsistent consumer protection. In May 2024, the CFPB classified BNPL lenders as credit card providers under the Truth in Lending Act and Regulation Z.7 The new rule requires that BNPL lenders must investigate disputes, credit refunds for returned or cancelled services, and provide billing statements.
Implications for Financial Stability
Another policy concern about BNPL is its implications for financial stability. Because most BNPL loans are not reported, they can become so-called “phantom debt” that introduces systemic risk. The impact of this risk depends on the market size of BNPL, its delinquency rates and the spillover effects onto other consumer credit products.
The market size of BNPL has been expanding: The 2022 CFPB report shows that the top five BNPL lenders issued $24.2 billion in BNPL loans in 2021, up from $2 billion in 2019.8 Since then, the market expansion has continued, though likely at a slower rate.
With no official data on the current BNPL market size, one may roughly estimate it by extrapolating individual firm information. The quarterly earnings reports of a leading BNPL provider shows that the firm experienced 50 percent growth in BNPL lending between 2021 and 2024. Assuming 50 percent growth for the top five lenders would put their total issuance at $36.3 billion, with additional lending coming from the rest of the industry.
The BNPL delinquency rates so far do not seem particularly high when compared to traditional consumer credit products such as mortgages, student loans, auto loans and credit card loans. The 2022 CFPB report shows that the loan charge-off rate — or the share of charged-off loans of all originated loans — for the top five BNPL lenders was 1.83 percent in 2020 and 2.39 percent in 2021, and the dollar credit loss provision was 1.15 percent in 2020 and 1.30 percent in 2021.9
While no official data is available for current BNPL delinquencies, the Financial Technology Association — which counts three BNPL lenders among its members — reports a delinquency rate among those companies of less than 2 percent.10 In comparison, the aggregate delinquency rate of overall consumer debts was 3.5 percent in the third quarter of 2024, including 8.8 percent of credit card balances transitioning to delinquency.
The BNPL delinquencies, however, tend to be a lower-bound measure of its credit risks, because BNPL may have spillover effects onto other consumer credit products. One risk associated with BNPL is not about borrowers who do not repay BNPL loans but rather about borrowers who do: The use of BNPL may induce some consumers to overborrow and threaten their ability to meet non-BNPL debt obligations.
There are several reasons that some BNPL users may prioritize BNPL repayment over other debts. For example:
BNPL loans require autopay using debit cards or credit cards, which could reduce borrowers’ bank account balances or increase their revolving balance on credit cards.
BNPL payment amounts are smaller than most other credit products, so borrowers may keep these payments current while debts with larger payments turn delinquent.
BNPL offers features designed to increase its attractiveness and habitual reuse, enticing some consumers to repay their BNPL loans ahead of other debts to keep their BNPL access or even increase their BNPL credit limit.
Another concern is that BNPL loans are not reported to credit rating agencies, so other BNPL or non-BNPL lenders do not know the borrowers’ full existing liability when making lending decisions. This can cause overextension of loans that increase their default risks.
Currently, the overall impact of BNPL on systemic risks is likely limited. In the third quarter of 2024, total U.S. household debt reached $17.9 trillion, including $12.6 trillion in mortgages, $3.2 trillion in combined student and auto debt, and $1.2 trillion in credit card debt. In comparison, the current market size of BNPL is relatively small.
However, the future growth of BNPL is worth monitoring. Because of its lower lending standards and non-reporting status, BNPL loans can become an entry point of risks that affect other consumer credit products, and it may cause overconsuming and debt accumulation for certain consumer groups.
Conclusion
As a consumer payment innovation, BNPL has brought user benefits to merchants and consumers. However, its impact on the efficiency of the payments system needs to be studied. BNPL also introduces risks that could affect individual financial health and broader financial stability. As BNPL services continue to grow, these risks could amplify if left unchecked. To prevent and mitigate risks, policymakers and industry participants should work together to ensure proper oversight, responsible lending practices and clear consumer protections.
Zhu Wang is vice president for research in financial and payments systems in the Research Department at the Federal Reserve Bank of Richmond.
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