U.S. consumers are projected to spend a record $18.5 billion using buy now, pay later (BNPL) services for holiday shopping in the upcoming quarter, according to Adobe Analytics. This marks an 11.4% increase from last year, reflecting a growing trend as Americans face escalating debt levels.
BNPL services enable shoppers to enhance their purchasing power by splitting payments into monthly installments, typically over four payments. The anticipated rise in BNPL spending outpaces the overall holiday spending growth, which is expected to increase by 8.4%, reaching approximately $240.8 billion between November 1 and December 31.
Companies like Klarna, Afterpay, and Affirm are poised to capture more market share, particularly in electronics and beauty products, as consumers increasingly turn to these services during the holiday season. However, there are concerns about shoppers using credit cards to finance BNPL installments, potentially exacerbating their debt burdens.
Delicia Hand, senior director at Consumer Reports, warned that relying on credit cards for BNPL purchases could trap consumers in a cycle of debt, leading to additional interest charges. “If the credit card balance isn’t paid in full, consumers incur interest on BNPL purchases along with any associated fees,” she noted.
Recent data from the Federal Deposit Insurance Corporation reveals that net charge-off rates for credit cards have risen to 4.82%, the highest since 2011. Additionally, a New York Fed survey indicated that 13.6% of consumers expect to become delinquent on loans in the next three months, a figure that climbs to 19.5% among those earning less than $50,000 annually.
Almost 10% of BNPL transactions are executed using credit cards and other payment methods outside debit cards, as per the Financial Technology Association. Despite this, the delinquency rates for BNPL purchases reported by its members remain under 2%.
Affirm anticipates a surge in demand for electronics this holiday season, with shoppers looking to upgrade devices purchased during the pandemic, while beauty products are also expected to be popular among BNPL users.
Affirm’s policy generally prohibits credit card payments on most loans, although they allow Pay in 4 purchases with down payments. Afterpay and Klarna have specific guidelines regarding payment methods, with both accepting debit and credit cards from major networks but restricting the use of cards from other BNPL providers.
In response to the growing popularity of BNPL, the U.S. Consumer Financial Protection Bureau (CFPB) has introduced new rules requiring BNPL companies to address consumer disputes and offer periodic billing statements, although these firms are not mandated to assess borrowers’ ability to repay loans.
As holiday spending approaches, the reliance on BNPL services amid increasing consumer debt raises significant questions about financial health and consumer behavior in the evolving payment landscape.
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