Buy Now, Pay Later Isn’t Just for Retail Anymore

Buy now, pay later (BNPL) started as a way to split a Shein haul into four payments. Spend a considerable amount and make payments over time to promote cash flow. It benefits retailers and consumers alike.

Today, the model has become so popular that it has migrated into other sectors, including healthcare, travel, groceries, and even rent. It seems as if there are few situations in which BNPL can’t apply. Find out what it means for your finances and investments.

How BNPL Works

If you’ve purchased anything online lately, you’ve likely seen an option at checkout to break your payment down into four (typically, but sometimes more or fewer) smaller payments.

Behind the scenes, it works like a credit card.

Retailers partner with financial institutions like Affirm, Klarna, Afterpay, and Zip. After a purchase is made, the retailer is paid in full, although financial institutions may take out a fee to cover their services. 

The balance transfers to the financial institution that collects the remaining payments from the customer. Generally, there is no interest in the initial payment term. However, if balances aren’t paid on time or additional payments are needed, interest may accrue.

Who Uses BNPL?

While anyone can use BNPL, it is especially popular with younger generations. According to PartnerCentric, Gen Z and millennials lead BNPL adoption at 59% and 58%, respectively. But the user base is broadening.

As the model expands into other industries, it is attracting older consumers and lower-income households who lack access to traditional credit. It is becoming a primary financial tool for a wide range of customers.

The Expanding World of BNPL

As mentioned, BNPL has extended beyond retail. Here are some other industries that work with this model.

Healthcare

Payment plans are common in the healthcare landscape and can cover almost any medical expense, from necessary procedures to cosmetic surgeries. Unlike the typical four payments, these plans spread payments over a year or multiple years. Additionally, healthcare payment plans are typically designated, whereas retail providers may cross over into other industries.

These payment plans allow people to access healthcare they may otherwise avoid or delay because of upfront costs. They help people address health-related issues early, before they worsen.

Travel

The travel industry has embraced BNPL as a popular payment option for airlines, hotel booking platforms, and travel agencies, and it is often built into their systems. It reduces travel costs, making it more affordable and keeping the industry healthy.

The only issue is what happens when you pay off two of your four installments and your flight gets canceled. In this instance, consumers may find themselves making installment payments on a booking that no longer exists. While refunds are possible, they may be more complex, given the financial landscape.

Groceries and Everyday Essentials

Some financial institutions have expanded to partner with grocery stores, drug stores, and similar market-type businesses to cover everyday expenses. The fact that people finance milk and eggs means BNPL is more than a platform for discretionary spending- it’s a cashflow management tool for households struggling financially. While innovative, these households must avoid taking on debt with these companies to avoid worsening their financial situation.

Rent and Housing

Perhaps the most striking expansion, financial institutions like Flex and Zip allow renters to split their rent into two installments. Landlords are paid in full, while the BNPL provider assumes the risk of installment payments.

This can be a great solution for renters who find themselves cash-strapped at the beginning of the month. However, if they fall behind, they may face late rent fees and compounding interest.

The Regulatory Landscape is Catching Up

For years, BNPL operated in a gray zone. But with rapid expansion comes a need for regulations.

The Consumer Financial Protection Bureau took action in 2021, creating an interpretive rule affirming that BNPL companies operate with many protections credit cards carry, such as the right to dispute charges, the right to refunds for returned items, and the right to periodic billing statements.

BNPL providers pushed back, arguing that the credit card framework was the wrong fit because they offered short-term, closed-end installment loans, not revolving credit. They claimed it created operational burdens without benefiting customers. The Trump-era CFB ultimately agreed and drew back the rule.

However, states like New York are stepping in to fill the gap on their own terms.

What Investors Should Watch

So how do BNPL models impact investors? Those looking into BNPL company investments may be interested to know that the market was valued at approximately $170 billion and is expected to grow to $423 billion by 2031, with a compound annual growth rate of over 16%. While the trajectory makes the industry a good investment, profitability and risk should also be considered.

In terms of risk, default rates are a concern. Research shows 2% of borrowers default on their BNPL loans. And with BNPL extending to groceries and other low-cost items, this indicates a financially strained target audience, increasing the risk of missed payments.

The inconsistency in regulation also poses a risk in the form of operational complexity, which can lead to uncertainty about long-term returns.

Another consideration is how BNPL can affect the investment appeal of other industries. It can benefit retailers, encouraging consumers to spend. Credit card companies, on the other hand, may feel the burn as individuals may choose these models over Mastercard and Visa.

Conclusion

BNPL’s migration out of retail reflects a trend of financial pressure and a need for payment flexibility. It could be the new credit card for those who may not otherwise qualify for financing, or a new way for people to accumulate debt. The framing comes down to how it’s used.

However, one thing is for sure- the technology isn’t going anywhere. For consumers, it presents opportunities; for investors, it presents risks with compelling growth balanced by default rates and regulatory uncertainty. The smartest approach for both is the same- go in with your eyes open.

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(Featured image by Vitaly Gariev via Unsplash)

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