How and Why Do Shoppers Use “Purchase Now, Pay Later”?

Felix Aidala, Daniel Mangrum, and Wilbert van der Klaauw

In a earlier put up, we highlighted that financially fragile households are disproportionately seemingly to make use of “purchase now, pay later” (BNPL) cost plans. On this put up, we shed additional gentle on BNPL’s place in its customers’ family funds, with a selected give attention to how use varies by a family’s degree of economic fragility. Our outcomes reveal considerably totally different use patterns, as more-fragile households have a tendency to make use of the service to make frequent, comparatively small, purchases that they could have bother affording in any other case. In distinction, financially secure households are likely to not use BNPL as often and usually tend to emphasize that BNPL permits them to keep away from paying curiosity on credit-finance purchases. We discover under what drives these variations and take into account the implications for future BNPL use.

Whereas the precise phrases of BNPL plans can fluctuate, they’ve been outlined by the Workplace of the Comptroller of the Foreign money as “loans which can be payable in 4 or fewer installments and carry no finance prices.” They’re typically supplied to web shoppers at checkout. BNPL plans have grown more and more distinguished lately, and at the moment can be utilized for all kinds of on-line purchases, starting from normal retail orders to quick meals deliveries. Nonetheless, due to the overall lack of regulation surrounding BNPL loans, little is thought about how and why households use them. To look at how BNPL use varies with a client’s monetary state of affairs, we draw on particular questions added to the October 2023 Survey of Shopper Expectations (SCE) Credit score Entry Survey. The survey is fielded each 4 months as a rotating module of the “core” SCE, which is itself a month-to-month, nationally consultant, internet-based survey of a rotating panel of family heads that has been carried out by the Federal Reserve Financial institution of New York since June 2013. Our pattern consists of about 1,000 households, with about 200 reporting BNPL use.

We differentiate between two kinds of respondents: 1) the financially fragile, whom we outline as having a credit score rating under 620, having been declined for a credit score utility prior to now yr, or having fallen thirty or extra days delinquent on a mortgage prior to now yr, and a pair of) all different respondents, whom we discuss with as financially secure. Our outcomes reveal totally different use patterns between the 2 teams, with the financially fragile being extra seemingly to make use of BNPL for frequent small purchases. As we focus on under, this discovering contrasts with previous survey proof suggesting that BNPL use is usually experimental, and it supplies additional proof that the choice is especially engaging to those that have bother acquiring credit score in any other case. We additionally present that throughout ranges of economic stability, it’s uncommon for folks to make use of BNPL simply as soon as. Certainly, about 72 % of financially secure customers and 89 % of financially fragile customers have made a number of BNPL purchases over the previous twelve months. Whereas we can not decide if this relationship is causal, it’s suggestive {that a} first use typically ends in repeat use, and it is going to be an element to observe as extra shoppers attempt BNPL for the primary time.

How Usually Do Households Use BNPL?

A rising variety of surveys, together with our personal, have proven that BNPL use is especially seemingly amongst financially fragile people. Nonetheless, comparatively little is thought about how typically households use BNPL. One exception is survey proof offered by our colleagues on the Federal Reserve Financial institution of Philadelphia’s Shopper Finance Institute (CFI) suggesting that BNPL use is basically experimental, with most customers not utilizing the service as a daily cost choice. That stated, provided that the CFI’s survey was carried out in November 2021 and that the panorama surrounding BNPL is quick altering, it’s doable that many first-time customers within the CFI survey have continued to make use of BNPL since.

Conditional on utilizing BNPL a minimum of as soon as, we requested respondents about their use frequency and common buy sizes. Much like our findings on which households use BNPL in any respect, we discover that the financially fragile are disproportionately seemingly to make use of BNPL at increased frequencies and seem to have embraced BNPL as a daily cost choice, as proven within the chart under. Certainly, amongst financially fragile BNPL customers, about 60 % have used the product 5 or extra occasions prior to now yr, which interprets to about 18 % of all survey respondents deemed financially fragile (which incorporates those that haven’t used BNPL within the final yr). This means that financially fragile customers are virtually 3 times as seemingly as financially secure customers to make use of BNPL 5 or extra occasions and means that high-frequency use could develop if the product continues to be adopted by financially fragile households. Provided that BNPL use within the U.S. has not been noticed over a full enterprise cycle, this issue can be notably vital to trace, as households could flip to BNPL if their monetary circumstances worsen.

BNPL Use Frequency by Monetary Fragility

Supply: SCE Credit score Entry Survey.

Our outcomes additionally point out attention-grabbing facets of financially secure households’ use patterns. Whereas about 68 % of financially secure BNPL customers have taken benefit of the product a minimum of twice prior to now yr, simply 23 % and 14 % have used it 5 or extra occasions and ten or extra occasions, respectively. This reveals that use by the financially secure tends to drop off considerably after just a few situations, however that there’s a small group of financially secure people who use BNPL often.

Buy Sizes

One other distinguishing issue between the 2 teams is the dimensions of the purchases they make. Whereas each teams are skewed towards comparatively smaller purchases, 62 % of financially fragile customers have a imply buy value underneath $250, in comparison with about 44 % of the financially secure (see chart under). the remainder of the distribution, this hole is basically made up in the fitting tail, as financially secure households are considerably extra prone to have a imply buy value between $1,750 and $2,000.

Share of BNPL Purchases by Value

Supply: SCE Credit score Entry Survey.

Importantly, we don’t discover family earnings to be a major driver of those disparities. Even after we management for earnings, financially fragile households make BNPL purchases which can be on common about $220 smaller than financially secure households, and so they make extra purchases, averaging about 4 extra BNPL purchases than secure family respondents prior to now yr.

The Anatomy of BNPL Use

To evaluate what’s driving these variations in use, we requested respondents an open-ended query on why they used BNPL. The phrase clouds under supply a visible illustration of the responses of the 2 teams, with the dimensions of every phrase indicating its frequency and prominence in solutions total.

Causes for BNPL Use Differ by Stage of Monetary Stability

Supply: SCE Credit score Entry Survey.

Whereas each teams emphasize the enchantment of spreading out funds, additionally they show key variations. The financially secure, for instance, often point out the benefits related to zero curiosity, whereas the financially fragile usually tend to describe ease of entry and comfort. Each teams are prone to point out credit score, however for various causes. For instance, the financially fragile are typically extra prone to point out having poor credit score, whereas the financially secure typically point out that they’d prefer to keep away from utilizing their bank card or that they see BNPL as a great methodology of constructing credit score. (As a result of BNPL lenders typically don’t furnish information to credit score bureaus, the latter statements could point out some extent of confusion among the many product’s customers, until they’re referring to constructing credit score with BNPL lenders particularly.) Lastly, the financially fragile usually tend to state that they’re making a purchase order that they don’t have cash for up entrance or that they may in any other case not afford, whereas the financially secure have a tendency to not emphasize this level.

Relating our qualitative responses to outcomes on frequency and spending quantities, we are able to start to color an image of differential BNPL use by monetary fragility. For the financially secure, BNPL use seems to be extra centered on just a few purchases and appears to be largely pushed by a need to keep away from paying curiosity on high-priced objects. In the meantime, use among the many financially fragile seems to be extra akin to a bank card, as consumers use the service to make medium-size, out-of-budget purchases often. One major driver of this distinction could possibly be entry to short-term debt by bank cards. For people close to their credit score restrict, BNPL could also be notably engaging as a strategy to clean consumption over the brief time period. In the meantime, these with ample credit score accessible could select to make use of BNPL for medium-size purchases as a strategy to keep away from carrying a stability and accruing curiosity. That stated, our outcomes additionally reveal some misunderstanding of the product, even amongst its customers, together with the financially secure, provided that some customers appear to imagine that BNPL will assist them construct credit score, as talked about above. These with this view could also be higher off utilizing a bank card.

Our outcomes even have implications for future BNPL use. They counsel that the most important barrier to client take-up is their first use, and that after this preliminary use shoppers have a tendency use BNPL once more. With about 80 % of households not utilizing BNPL prior to now yr, there should be quite a lot of room for elevated adoption of the product. This can be notably vital to observe within the coming months, as many patrons used BNPL for the primary time this previous vacation season.

Chart information

Felix Aidala is a analysis analyst within the Federal Reserve Financial institution of New York’s Analysis and Statistics Group.

Daniel Mangrum is a analysis economist in Equitable Development Research within the Federal Reserve Financial institution of New York’s Analysis and Statistics Group.

Wilbert van der Klaauw is the financial analysis advisor for Family and Public Coverage Analysis within the Federal Reserve Financial institution of New York’s Analysis and Statistics Group.

Find out how to cite this put up:
Felix Aidala, Daniel Mangrum, and Wilbert van der Klaauw, “How and Why Do Shoppers Use “Purchase Now, Pay Later”?,” Federal Reserve Financial institution of New York Liberty Road Economics, February 14, 2024, https://libertystreeteconomics.newyorkfed.org/2024/02/how-and-why-do-consumers-use-buy-now-pay-later/.