Buy Now, Pay Later enters 2022 on a roll. The sector looks set to continue strong growth as we move into 2022, bolstered by changes in fundamentals that range from demographics to technology. The final numbers won’t be out for a while, but all the evidence points to record usage during the recent holiday shopping season, with volumes considerably above 2020 levels. This has fed awareness – and hence demand – from shoppers and from the retail outlets looking to satisfy them.

For last year as a whole, estimates suggest that consumers made some $100 billion in payments using point-of-purchase lending, more than quadruple 2020’s $24 billion. According to some predictions, BNPL is expected to be worth $166 billion globally by 2023.

Important alliances have also been struck between BNPL providers and retailers. Larger BNPL players made acquisitions to broaden their offerings, or were bought by outsiders in headline-making multibillion dollar deals. And entrenched financial, tech and retail companies sought to get in on the action by spinning up their own versions of BNPL.

None of this is surprising, given the benefits BNPL offers to both retailers and shoppers.

For the retailer, providing at least one point-of-purchase lending option lifts sales volumes by putting products within reach of buyers who might not previously have been able to afford them. And consumer polling suggests that those offered BNPL as a payment option are much more likely to finish browsing expeditions by buying: a measure known in the retail industry as the “conversion rate”.

Digital outlets seeking loyalty should take note here. Those happy customers who were able to make their purchases with the help of BNPL are also 20% more likely to come back, according to statistics from the U.S. BNPL provider Affirm.

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Avoiding pitfalls on the road to success

So what lies ahead for BNPL as it advances toward this brave new future? And what potential pitfalls will the sector have to sidestep on the road to widespread adoption?

In the coming year (or two), experts see more consolidation, bigger gains, growing acceptance by older generations and increasing efforts by established tech, finance and retail companies to find a way into the space. Some suggest that the increase in global inflation rates may spark further gains for BNPL, as consumers may seek to lock in lower prices while spreading out payments.

Some providers may seek to escape the crowd and carve out specialist niches as use cases expand to encompass bigger-ticket purchases. In September, Goldman Sachs paid $2.24 billion for GreenSky, which specializes in helping homeowners renovate.

Nor is this the first time Goldman has shown interest in the sector. In July, it agreed to help Apple build out a service for Apple Pay customers.  

Other banks are trialing ways to lure customers away from their upstart rivals. Some have launched zero-interest credit cards and flexible lending options, while others are said to be weighing such moves in the new year.  

Banks may be wary of BNPL’s immense popularity with younger generations – those digital native consumers sought after by ecommerce companies who, because they have grown up with the Internet, tend to demand more ease and flexibility.

According to a report from eMarketer on payment trends to watch, while Millennials and Gen Z will remain the dominant BNPL users in the years to come, growth rates will start to tail off in 2023 and beyond. Usage among older Gen X and Baby Boomers, meanwhile, will start to accelerate, helping to pick up the slack.

This demographic shift may ultimately be a good thing for the healthy long-term growth in the industry, since older generations are less likely to spend more than they can afford.

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The charm of convenience

With low – or no – interest rates and fees, BNPL would seem at first glance a better option than traditional credit. By allowing buyers to avoid adding to credit card debt, the use of BNPL can actually blunt the impact of a purchase on the buyer’s credit score – particularly when made via a provider who does not tie usage to credit rating.

There are risks to such easy terms for both borrowers and lenders, however. Buyers may be tempted by the speed and convenience of push-button borrowing to accumulate more debt than they can readily repay, leaving them vulnerable to changes in personal fortunes.

Anonymized data from Optty suggests that when shoppers max out their credit with one BNPL provider, they will move on to the next – and often win approval to go ahead with their purchase. The process is quick and efficient … and for some buyers, can be a problem.

According to a survey of more than 1,000 U.S. shoppers released by Credit Karma, 34% of the shoppers who had used BNPL confessed to falling behind on at least one payment. And of those, 72% said they saw a resulting impact on their credit score.

These concerns, coupled with jealousy in banking circles over BNPL’s success, may prompt regulators to take a closer look at a sector that is unregulated in most corners of the world. BNPL providers and retailers may be wise to get ahead of the curve by increasing transparency with consumers: reminding them to read terms carefully, say, or helping them do a self-assessment of all their borrowings before plunging ahead with a major purchase.

Crucially, none of these changes – from demographic shifts to consolidation to increased interest from regulators – is likely to put the brakes on what promises to be a strong year ahead.

Forecasters see ecommerce sales growing by leaps and bounds in the next few years as more and more consumers shift online and away from brick-and-mortar stores. And any retailer who wants to keep online shoppers loyal and happy would be wise to ensure that a full selection of BNPL offerings are available.

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