Pay Later Users Split Between ‘Choice’ and ‘Necessity’

Pay later options have shaken up the retail world over the past several years. As opposed to traditional credit options that offer a maximum limit on a card and bill the user for all monthly purchases, pay later programs allow the user to split a single purchase over a set number of payment installments, sometimes without fees or interest. The concept is similar to traditional layaway, with a key difference: The customer takes immediate possession of their purchased goods and owes the pay later financial provider — not the retailer.

This element of instant gratification has made pay later programs exceptionally popular, especially among younger consumers. Banks and FinTechs are also eager to enter the pay later market and make the most of this demand, but it’s critical for them to understand how consumers are using these tools in order to tailor their offerings appropriately. Hint: It’s not what anyone expected. The recent PYMNTS Intelligence report “Redefining Retail: Consumer Finance Trends Driving the Evolution of Pay Later Plans” identified some of the major consumer segments and use cases emerging in pay later utilization to help direct providers’ efforts accordingly.

• Most Consumers Leverage Pay Later Plans
• ‘Choice’ vs. ‘Necessity’: The Two Types of Pay Later Users
• Big-Ticket vs. Everyday Purchases
• An Insider on Why Pay Later Is Here to Stay

Most Consumers Leverage Pay Later Plans

The May PYMNTS Intelligence report, which was based on a survey of more than 2,600 consumers, found that 54% of respondents used some type of split-payment option in the last year, including 65% of Generation Z and millennial shoppers. Among all plan types, general-purpose card-linked installment plans were the most common, at 40%, followed by buy now, pay later (BNPL) plans — defined as those offered by traditional pure players such as Affirm, Klarna, PayPal and Sezzle — at 33%. Nearly half of Gen Z and millennials used BNPL at least once in the previous year, with a February report having shown that 23% of shoppers in both segments increased their usage of the method in the past year.

While credit cards remain the dominant form of credit, with 66% of consumers using them in the past year, BNPL services have emerged as the second-most popular form of credit. BNPL’s popularity is attributed to its accessibility, as it often requires no credit checks or lengthy application processes. How this plays out in defining its most prolific users and use cases is changing what everyone once thought about BNPL.

‘Choice’ vs. ‘Necessity’: The Two Types of Pay Later Users

A good example of the emerging consumer personas using pay later methods can be found in the specific case of BNPL. In its earliest iterations, BNPL was imagined by some primarily as a way to grant easier credit access to lower-income consumers.

The PYMNTS Intelligence research from the report, however, reveals a more complex reality. Accessing credit was, in fact, one of the two primary reasons consumers used BNPL — but, surprisingly, it was not the top reason. Users fell into one of two categories: “necessity users,” who had lower incomes and limited access to traditional credit, and “choice users,” who had higher incomes and access to other credit.

While BNPL offered a way for necessity users to make essential purchases like clothing and groceries on a limited budget, choice users leveraged BNPL “by choice,” i.e., as a strategic tool to optimize cash flow and manage payment for larger purchases. Nearly two-thirds (63%) of users cited cash flow management as an important reason they chose BNPL — making it the most common reason for BNPL use. Overall, more consumers used BNPL as a strategic choice to manage cash flow than out of necessity to cover a need.

Big-Ticket vs. Everyday Purchases

PYMNTS Intelligence also looked at BNPL usage versus other pay later methods. Interestingly, consumers used general-purpose credit card-linked installment plans to cover the largest average purchase amount, at $2,095, whereas the average transaction amount for BNPL was only $926. The conclusion would seem to be that while consumers tend to use credit card-linked installments more for big-ticket items, BNPL is emerging as a financial management tool for everyday essentials. This is especially true of younger users. Although nearly one-quarter of consumers (23%) would use BNPL for everyday items, this share rose considerably for Gen Z consumers (28%) and millennials (35%).

Out of necessity, 40% of BNPL consumers used the method for clothing and accessories purchases in the last year, with groceries following, at 22%. Meanwhile, card-linked installment plans are becoming the go-to payment method for a wider range of generations to use on big-ticket items, with 54% of Gen X, baby boomers and seniors using pay later options on their general-purpose credit cards for purchases greater than $1,000.

An Insider on Why Pay Later Is Here to Stay

“Today’s younger consumer expects to access all things, including their financial products, on demand in real time. Pay later providers have done an exceptional job of providing their services in easy-to-use mobile experiences that fit the younger generations and their preferred way to consume, via their phones or online.”

As a global provider of digital issuance capabilities, Thredd sees many flavors of pay later product offerings.

“Some of our clients cater to business-to-business purchases, which often skew to larger, planned transactions, whereas other clients provide financial services directly to consumers for everyday purchases like medicine or groceries, which tend to be smaller transaction amounts,” Ryan Dew, Thredd’s SVP of Product Solutions, told PYMNTS Intelligence.

Dew has also seen a good mix of utilization across a broad demographic range, including consumers with challenged credit who use BNPL for necessities as well as prime users who leverage it to manage cash flow. Above all, he said, pay later options provide consumers with convenient ways to pay, making them a permanent fixture on the payments landscape.

“Many pay later options are provided at either no cost or a fixed cost over the duration of the term,” he explained. “This provides consumers a transparent way to understand what they are paying and offers simplified budgeting tools. Another advantage not often offered by standard revolving credit is flexibility over length of term and fee schedule.”

Dew said it is also no surprise that younger consumers are adopting pay later options in much greater numbers. He attributes this to their being new to credit and finding it much tougher to qualify. Another reason is these generations’ fear of debt.

“Millennials and Gen Z have come of age as spenders during times when credit has been viewed as the cause of stress in people’s lives,” Dew said. “With pay later options, younger consumers see a way to buy the things they need without overextending themselves with bad credit.”

Finally, Dew said, merchants and FinTechs have optimized digital user experiences to make qualifying for a pay later plan easy and, in many cases, instant. This potent cocktail of convenient credit access, alleviation of debt worries, and sophisticated digital experiences is cementing pay later’s place in the payment options menu of today — and tomorrow.