Deep Dive: Pandemic-Related Budget Concerns Push BNPL Growth

Consumer spending has sharply declined since the COVID-19 pandemic led to worldwide economic closures. The U.S. Department of Commerce recently reported that spending in the country fell 7.5 percent from March to April, representing an approximately $1.1 trillion drop in companies’ revenues and one of the most precipitous month-to-month declines the U.S. has seen since January 1987.

The economic downturn has led to layoffs and consumers appear to be preparing for rainier days. They are saving more money, making fewer extraneous purchases and putting more funds toward paying off existing bills, for example: The savings rate among U.S. consumers increased to 13.1 percent in March from 8 percent in February. These individuals are in no mood for transactions that would add to their existing bills, meaning credit card fees and interest are factors when they shop for goods and services — and sometimes tip them toward abandoning their carts entirely. Payments network Visa saw credit card transactions decrease by 31 percent through the end of April as consumers focused their purchasing on necessities like groceries.

Providing flexible payment methods that customers feel they can afford is now retailers’ goal, as many are also experiencing financial strains from COVID-19. The following Deep Dive will examine installment payments’ growing popularity during the pandemic and detail how current financial insecurities may push the Buy Now Pay Later (BNPL) industry forward.

Adding Financial Security 

The economic upheaval following the COVID-19 pandemic has accelerated the number of companies and consumers trying alternative payment options for complementary reasons. Both sides in the U.S. are facing steadily tougher financial situations, with rising unemployment rates and increasing concerns about the economy cutting consumers’ purchasing power as well as companies’ revenues. Each is therefore working to make essential transactions affordable or more seamless, and each has determined that BNPL products are viable potential solutions.

BNPL options turn single large purchases into several smaller transactions, often without interest if paid off quickly. The method allows customers to either buy more items or afford more expensive goods over time with more financial wiggle room. These products have therefore become more attractive to customers than methods that add fees to the final purchase tally, both in general and as the pandemic continues.

Such payments can also help both consumers and retailers rediscover the sense of stability they desire during uncertainties like the economic downturn. Consumers can feel more comfortable replacing appliances that may have broken at the worst possible time, for example, such as right after employees lose their jobs or in the midst of a global health crisis. BNPL offerings can also be used to ease the costs of smaller ticket items and help individuals afford the day’s groceries.

The financial security BNPL solutions provide is currently resonating with a rising number of consumers. Many installment payment providers have reported increases in customer adoption figures and greater shares of repeat customers as BNPL enthusiasm picks up, for example. BNPL provider Afterpay stated it saw $1 billion in U.S. sales and served 4.4 million customers for the third quarter of its 2020 fiscal year — a 238 percent increase in its userbase over the same quarter in 2019. That timeline also includes the decline in credit cards transactions reported by Visa, indicating consumers might currently be moving away from credit toward BNPL.

BNPL-related discussions are cropping up with more frequency in the U.S. as the pandemic continues and as bankers and regulators look to alternatives like digital wallets to help suppressed businesses and consumers generate more financial stability during this time. Regulators argue such quick digital payment methods could mean that government funds, such as money from the Paycheck Protection Program (PPP), could be more easily distributed to small businesses, for example.

All these developments are focused on short-term improvements, which seems to indicate both banks and regulators are hoping that current spending damage can be swiftly mitigated. Recent research suggests rising interest in BNPL options during this period may be due to more than just financially stressed consumers and retailers hunting for quick fixes, however, and may instead be part of a wider shift in how customers want to make payments.

BNPL’s Rise And Credit’s Fall  

The pandemic may have created more interest in or awareness of installment payments, but usage was already on the rise in markets like the U.S. and Australia. BNPL’s ability to cut immediate costs interested customers in these markets before COVID-19 began to intensify the financial pressures they were facing.

This concept has become much more important to consumers who may lack steady employment or who might currently be relying on savings to get them through layoffs or furloughs, especially those of younger consumer demographics. Younger consumers often earn lower incomes and have less savings than their Generation X or baby boomer counterparts simply because they have had less time to move up in their companies’ ranks or set extra funds aside. They have also been among the most impacted by credit card debt and fees during the COVID-19 pandemic.

One recent survey shows 34 percent — or about one in every three millennials — have added to their credit card debt since the pandemic’s onset, which is an important statistic in light of the surge in interest in BNPL products. These consumers, many of whom are already dealing with student loan bills and other sources of high-interest debt, have a historic distrust for credit. This initial distaste is among the reasons why many in this generation were already interested in BNPL solutions well before the COVID-19 pandemic started taking its toll.

The payment method is most popular among shoppers of younger generations, with Afterpay noting that 65 percent of its U.S. users are either millennials or from Generation Z. This suggests BNPL products have the potential for a strong future: Younger customers are unlikely to gain more appreciation for credit products — during or after the pandemic — but their opinions on installment payments appear to be less set in stone.

This could represent an opportunity for retailers that wish to build more trust and longer-lasting relationships with these shoppers. BNPL product providers, developers and merchant partners still have time to prove that consumers’ responsible use of installment payments can help customers afford what they need without the pressures of added interest and accruing more debt. Closely observing how these customers are using BNPL offerings during the pandemic will thus be critical to adoption figures and future product rollouts.