Report Overview
As of Q2 2024, US consumers owed financial institutions $5.07 trillion in consumer credit which is divided between $1.35 trillion in revolving credit and $3.72 trillion in non-revolving credit.
Revolving credit products, principally credit cards, are lines of credit extended to consumers which can be paid off and tapped anew throughout the life of the credit relationship between consumer and lender. Non-revolving credit products, including auto and student loans, are fixed-term loans which are repaid in installments.
Buy Now, Pay Later (BNPL) installment loans were designed as no-interest or low-interest options for consumers to pay for purchases in four equal payments over six weeks. In their original iteration, they were short term loans for small dollar purchases. Originally called POS installment loans, BNPL has become the standard term as the category has evolved and expanded as the category has expanded with additional no-interest/low-interest payment products.
While BNPL loans are structured as traditional installment loans (i.e., the consumer makes a down-payment, assumes control of the purchased item and over time, repays the balance of the debt), they rely heavily on the architecture of the credit card industry to enable transactions.
For instance, credit approvals for BNPL installment loans often leverage the credit line authorizations of credit card issuers to determine the credit worthiness of their own borrowers. Others allow repayment of BNPL loans by credit or debit cards.
BNPLs increasingly mimic credit cards in another way. As their shoppers purchase and repay BNPLs, lenders increase their credit lines and allow their customers to make multiple purchases before the first loan has been repaid. As additional low-dollar installment loans stack atop the first one and as BNPL credit lines increase, for example from $500 to $2,000, the BNPL itself begins to operate as evergreen, revolving credit. Except for interest accrual, the BNPL operates much like a credit card.
The widespread adoption of BNPL products poached from credit card issuers as consumers chose to finance purchases with zero/lower interest rate, fixed-term installment loans offered by fintechs rather than risk incurring a revolving balance on their credit cards. Despite some repayments being made by credit card, which earns the credit card issuer interchange income, the New York Federal Reserve Bank has found that 77% of BNPL users made installment repayments using a debit card, bank account, or bank check; 10% used a credit card; 6% used a prepaid card; and 8% used a payment service such as Venmo.
The Buy Now, Pay Later: Point of Sale Installment Loans in the US Market and International Perspectives, 4th Edition market research report presents a deeply detailed analysis of the opportunities and challenges confronting extant and new participants in the BNPL sector. It examines macro and micro drivers of transaction volume, repayment rates and costly government regulations that may drive pure play fintechs (financial technology companies) out of an industry already characterized by its razor thin margins.
Additionally, the report reviews current US consumer borrowing behaviors; strategic positioning initiatives by fintechs as well as traditional consumer credit industry participants, including banks, finance companies, credit unions, credit card issuers and the credit/debit card networks.
The report also analyzes each of the principal business models in the industry, examining the potential viability of each model as more competitors emerge and bring their own marketing messages, merchant partnerships and revenue models.
The report provides US BNPL growth rate for 2017 to 2022, as well as 2023 total and year-by-year forecasts through 2028. These projections reflect the swift and durable changes in consumer payment preferences adapting to perniciously high interest rates, the efforts by global governments to regulate the BNPL industry, as well as macro-US economic and more granular household spending and demographic detail. While focusing on the BNPL installment loan industry in the US, this report also covers the wider context on BNPL financing in Asian, European, and Latin American countries.
More Consumers Use Card Payments Than Have a Bank Account
Increased debit and credit card use between 2022 and 2023 resulted in more than 60% of payments being made with credit (33%) and debit cards (30%). Cash was the third most popular and was used in 15% of payment transactions.
Adoption of payment cards was the highest recorded since 2015, with 99% of consumers owning a debit, credit, or prepaid card—more than the share of consumers reporting they had a bank account. Half of consumers with a credit card had one or two credit cards, and almost 25% had five or more.
The Consumer Credit Market Before BNPL Installment Finance
Finance Companies and Credit Card/Store Card Lines of Credit
Traditional Lenders Shaped Consumer Finance for Decades
Since the middle of the last century, traditional banks, credit card issuers, and consumer finance companies have generally considered consumer payment needs at point of sale (POS) to be well addressed. Most purchases could be charged to a credit card and paid off either as soon as the next card bill arrived, or in small monthly payments that created some cash flow breathing room. Consumers could finance larger purchases, such as furniture, through a consumer finance company and then pay off their balances over a period of months or years. Home equity loans (with their tax-deductible interest) were consumers’ preferred credit vehicle for their largest purchases, such as home improvement/repair projects.
Even Among Traditional Providers, Innovation Has Been Ongoing
Nonetheless, within that segmentation of lenders, merchants, and purchasing consumers, innovations to be the consumer’s choice for each transaction were always ongoing. Payment cards morphed from plastic cards in physical wallets to digital cards in mobile wallets. Security enhancements such as EMV chips, virtual cards and upgraded retail payment infrastructure bought more people more options, plus greater confidence in transacting in the digital world of commerce.
Credit Cards Are Not Enough
However, the credit card is expensive for merchants to accept and expensive for consumers who carry a high-interest-rate balance. While there are many advantages to the credit card (security, portability, cross-border acceptance, and both physical and digital retailer acceptance, to name a few), numerous opportunities remain for additional payment products that address unmet consumer and retailer preferences, needs, and opportunities.