BNPL can ease the pain of inflation

Grim news about galloping inflation is reaching us from all sides. Rising commodity prices have a ripple effect throughout the economy, with producers increasingly forced to pass on rising input costs to buyers. With inflation rates in many countries at levels not seen in decades, consumers around the world are struggling to make ends meet.

All of these factors limit discretionary spending, whether it’s replacing an outdated appliance, updating decor, or buying the latest electronics.

As many consumers struggling with reduced purchasing power are discovering, alternative payment systems such as Buy Now, Pay Later can help ease the pain of higher prices.

BNPL is an increasingly popular payment option. Unlike traditional credit card debt, BNPL loans generally incur no interest charges or fees, and few require rigorous credit checks.

BNPL lenders make their money from retailers, who pay them a small percentage of the price of each purchase, an investment that pays off in the form of increased customer loyalty, higher sales and reduced credit risk. .

Usage was already on the rise before 2020, especially among Millennials and Gen Z. But it jumped orders of magnitude when the world was crippled by COVID-19 and shoppers turned massively to online shopping.

Today, BNPL is ubiquitous, a payment option on thousands of e-commerce sites and physical stores. Providers such as Klarna, AfterPay and Affirm are becoming household names, while banks and credit card companies are launching their own versions of BNPL.

By 2025, the sector is expected to account for 5.3% of the global value of e-commerce transactions or $438 billion, according to a report 2022 by Worldpay. That’s up from 2.9% or $157 billion in 2021.

Why BNPL?

So what impact has rising prices had on this growth trajectory? A positive, at least so far.

This is partly because BNPL offers flexibility at no additional cost. The ability to spread payments over time without accumulating interest charges can allow a household to make a major purchase that would otherwise be out of reach, especially in times of rising prices.

There is also a predictable payment structure over a set period, which can help consumers get through tough times without having to take out loans, save money, or use credit cards.

Nearly 60% of American consumers surveyed by credit karma said inflation makes it more likely that they will use BNPL. More than half of those who do now – 53% – attribute it to necessity, while 45% said it would be their chosen method of payment in the event of a shortage of funds.

The use of BNPL is also not reserved for expensive items. According to a survey by financial services consultancy Global RFI, more and more consumers are using installment payments to help manage budgets strained by the rising cost of living. A third of consumers surveyed in Australia and the UK would be willing to use point-of-sale loans for household bills, groceries and fuel.

One in 12 UK residents have used BNPL for basics such as food and toiletries in the past six months, according to a January survey by the charity. Advice to citizens. Those who were younger, in debt or collecting benefits like unemployment are more than twice as likely to have done so than the general population, he found.

Helping consumers navigate stormy waters

But while it may help, BNPL is not a panacea. Experts and suppliers warn that the number of people making late payments – and thus risking fees and/or interest charges – is set to increase if rising prices continue unchecked.

A 2020 study by a financial website the ascent showed that, among Americans who used a BNPL system, almost half – 45% – did so to purchase items that were beyond their means.

Additionally, nearly 70% of BNPL consumers said they spent more than they would have had they paid in full up front, according to LendingTree.

Households deemed financially vulnerable are almost four times more likely to use BNPL than those in good financial health, according to a US survey by the Financial Health Network. And in a survey of British consumersmore than half of young adults surveyed said the rising cost of living made them less sure of making their BNPL payments.

Many BNPL providers are turning to technology to assess and mitigate default risk. Tools are evolving to allow installment lenders to quickly perform a “soft” check on past buying and borrowing behaviors that don’t impact their credit score. BNPL aggregators can offer a suitability score based on a larger data set, helping lenders decide in seconds if a buyer is a good or bad risk.

Experts are mixed on how long inflation will weigh on personal finances, but most see little sign of relief in the near future. The economic impacts of COVID-19, supply chain disruptions and the Russian invasion of Ukraine are just some of the global developments that could have repercussions for some time to come.

At times like these, it is more important than ever for BNPL’s suppliers to help merchants and customers make financially smart decisions. Businesses need to be upfront about the consequences of missed payments and defaults. Many lenders have other solutions to help customers avoid falling behind.

Klarna, for example, offers shoppers advice on personal finances while Afterpay has a hardship policy that invites customers to get in touch to discuss options like a revised repayment plan if they run into difficulty.

With retail prices soaring around the world, it is more important than ever that BNPL acts as a force for good in the lives of consumers, helping them get through tough times without undue financial risk.

Natasha Zurnamer is co-founder and CEO of opted

Kayleen C. Rice