Home Economics How and Why Do Customers Use “Purchase Now, Pay Later”?

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

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


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 mild on BNPL’s place in its customers’ family funds, with a selected deal with how use varies by a family’s degree of monetary 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 may have hassle affording in any other case. In distinction, financially steady households are likely to not use BNPL as ceaselessly 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 think about the implications for future BNPL use.

Whereas the precise phrases of BNPL plans can differ, they’ve been outlined by the Workplace of the Comptroller of the Forex as “loans which are payable in 4 or fewer installments and carry no finance costs.” They’re usually supplied to web shoppers at checkout. BNPL plans have grown more and more outstanding in recent times, and at present can be utilized for all kinds of on-line purchases, starting from commonplace retail orders to quick meals deliveries. Nonetheless, due to the final 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 scenario, we draw on particular questions added to the October 2023 Survey of Client 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 software prior to now 12 months, or having fallen thirty or extra days delinquent on a mortgage prior to now 12 months, and a couple of) all different respondents, whom we confer with as financially steady. 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 generally experimental, and it gives additional proof that the choice is especially engaging to those that have hassle acquiring credit score in any other case. We additionally present that throughout ranges of monetary stability, it’s uncommon for individuals to make use of BNPL simply as soon as. Certainly, about 72 p.c of financially steady customers and 89 p.c of financially fragile customers have made a number of BNPL purchases over the previous twelve months. Whereas we can’t decide if this relationship is causal, it’s suggestive {that a} first use usually ends in repeat use, and will probably be an element to observe as extra shoppers attempt BNPL for the primary time.

How Typically 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 usually households use BNPL. One exception is survey proof introduced by our colleagues on the Federal Reserve Financial institution of Philadelphia’s Client Finance Institute (CFI) suggesting that BNPL use is basically experimental, with most customers not utilizing the service as a daily cost possibility. That mentioned, provided that the CFI’s survey was carried out in November 2021 and that the panorama surrounding BNPL is quick altering, it’s attainable 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. Just 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 larger frequencies and seem to have embraced BNPL as a daily cost possibility, as proven within the chart under. Certainly, amongst financially fragile BNPL customers, about 60 p.c have used the product 5 or extra occasions prior to now 12 months, which interprets to about 18 p.c of all survey respondents deemed financially fragile (which incorporates those that haven’t used BNPL within the final 12 months). This suggests that financially fragile customers are nearly 3 times as seemingly as financially steady 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 shall be significantly essential to trace, as households could flip to BNPL if their monetary situations worsen.

BNPL Use Frequency by Monetary Fragility

Three-panel Liberty Street Economics chart showing the percentage share of “buy now, pay later” users at each level of financial fragility—financially fragile or financially stable—who have used BNPL two or more times, five or more times, or ten or more times in the past year.

Supply: SCE Credit score Entry Survey.

Our outcomes additionally point out attention-grabbing features of financially steady households’ use patterns. Whereas about 68 p.c of financially steady BNPL customers have taken benefit of the product a minimum of twice prior to now 12 months, simply 23 p.c and 14 p.c have used it 5 or extra occasions and ten or extra occasions, respectively. This reveals that use by the financially steady tends to drop off considerably after just a few situations, however that there’s a small group of financially steady people who use BNPL ceaselessly.

Buy Sizes

One other distinguishing issue between the 2 teams is the scale of the purchases they make. Whereas each teams are skewed towards comparatively smaller purchases, 62 p.c of financially fragile customers have a imply buy value below $250, in comparison with about 44 p.c of the financially steady (see chart under). Taking a look at the remainder of the distribution, this hole is basically made up in the proper tail, as financially steady households are considerably extra more likely to have a imply buy value between $1,750 and $2,000.

Share of BNPL Purchases by Worth

The authors shed further light on the place of “buy now, pay later” (BNPL) in its users’ household finances, with a particular focus on how use varies by a household’s level of financial fragility.

Supply: SCE Credit score Entry Survey.

Importantly, we don’t discover family earnings to be a main driver of those disparities. Even after we management for earnings, financially fragile households make BNPL purchases which are on common about $220 smaller than financially steady households, and so they make extra purchases, averaging about 4 extra BNPL purchases than steady family respondents prior to now 12 months.

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 provide a visible illustration of the responses of the 2 teams, with the scale of every phrase indicating its frequency and prominence in solutions general.

Causes for BNPL Use Range by Stage of Monetary Stability

Side-by-side word clouds showing terms used frequently by financially stable BNPL users (on the left) and financially fragile BNPL users (on the right) when asked why they use BNPL. “Payments” dominates both, with “interest” and “credit” also prominent for stable users and “easy” and “money” also prominent for fragile users.

Supply: SCE Credit score Entry Survey.

Whereas each teams emphasize the attraction of spreading out funds, additionally they show key variations. The financially steady, for instance, ceaselessly point out the benefits related to zero curiosity, whereas the financially fragile usually tend to describe ease of entry and comfort. Each teams are more likely to point out credit score, however for various causes. For instance, the financially fragile are usually extra more likely to point out having poor credit score, whereas the financially steady usually point out that they’d wish to keep away from utilizing their bank card or that they see BNPL as a superb technique of constructing credit score. (As a result of BNPL lenders usually don’t furnish knowledge to credit score bureaus, the latter statements could point out some extent of confusion among the many product’s customers, except 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 might in any other case not afford, whereas the financially steady have a tendency to not emphasize this level.

Relating our qualitative responses to outcomes on frequency and spending quantities, we will start to color an image of differential BNPL use by monetary fragility. For the financially steady, BNPL use seems to be extra centered on just a few purchases and appears to be largely pushed by a want to keep away from paying curiosity on high-priced gadgets. In the meantime, use among the many financially fragile seems to be extra akin to a bank card, as buyers use the service to make medium-size, out-of-budget purchases ceaselessly. One main driver of this distinction might be entry to short-term debt by way of bank cards. For people close to their credit score restrict, BNPL could also be significantly engaging as a solution to easy consumption over the quick time period. In the meantime, these with ample credit score accessible could select to make use of BNPL for medium-size purchases as a solution to keep away from carrying a steadiness and accruing curiosity. That mentioned, our outcomes additionally reveal some misunderstanding of the product, even amongst its customers, together with the financially steady, 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 recommend that the biggest 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 p.c of households not utilizing BNPL prior to now 12 months, there should be an excessive amount of room for elevated adoption of the product. This shall be significantly essential to observe within the coming months, as many patrons used BNPL for the primary time this previous vacation season.

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Image of Felix Aidala

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

Image of Daniel Mangrum

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

Photo: portrait of Wilbert Van der Klaauw

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.

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

The views expressed on this put up are these of the writer(s) and don’t essentially replicate the place of the Federal Reserve Financial institution of New York or the Federal Reserve System. Any errors or omissions are the accountability of the writer(s).



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