Why pay all at once?
It’s a question consumers are getting asked more often at checkouts, as installment plans resembling those offered by “buy now, pay later” services pop up in more places.
Popular BNPL offerings like Afterpay, Affirm, Sezzle, Klarna and others — which let borrowers break up a purchase into several equal installments with little or no interest — exploded during the pandemic, fueled by lockdown-era e-commerce, stimulus checks and savings. Adoption of the installment loans has cooled since then, but their influence over how consumers spend with borrowed money is just getting started.
It was exactly what I needed to do some fun stuff and not go into debt. Or at least not feel like I’m going into debt.
Aaron Gans, 37, New York City
Aaron Gans, a 37-year-old resident physician in New York City, got a notification in March from his American Express Platinum card offering to split his and his husband’s $1,700 charge for their flights to Taiwan and South Korea into 12 interest-free installments. He said yes.
“It was exactly what I needed to do some fun stuff and not go into debt,” said Gans. “Or at least not feel like I’m going into debt.”
In an era of stubborn inflation and stretched household finances, as well as high interest rates stoking fears of credit card debt, lenders are leaning into a model that many shoppers — especially younger ones — are embracing as a way to keep spending. That BNPL-ification of consumer credit is underscoring existing socioeconomic divides, with people of different means paying off debt in installments for different reasons.
American Express began rolling out more features like the one Gans recently took advantage of several years ago, just as BNPL startups surged in popularity. Amex made its “Plan It” program available for travel bookings in 2021 — the same year Mastercard and Barclays unveiled their own BNPL programs — and expanded that and related offerings to more of its cards last summer.
“All your major card issuers are going to be watching the success” of BNPL services, said Ben Danner, senior analyst at Javelin, a payments-focused research firm. “They wanted some of that market share.”
Retailers have been getting in on the action, too. In April, a Walmart-backed startup began offering BNPL loans for big-ticket items at thousands of stores, effectively adding an in-house option to compete with Affirm, the retailer’s exclusive BNPL provider since 2019.
Others are finding ways to offer customers installment features without additional transaction fees. Last year, Amazon partnered with Citi to let cardholders use the brand’s Flex Pay option with any merchant using Amazon Pay.
But moves like these coincide with a slowdown in BNPL usage overall.
By March, growth in the share of Bank of America customers with an active BNPL payment was lower than 12 months earlier, researchers at the bank said last month, and adoption was down nearly fourfold since March 2021. In a survey by The Motley Fool, an investing advice company, just 35% of adults said last year that they’d used a BNPL loan at least once, down sharply from 50% in 2022 and 56% in 2021.
That’s not necessarily surprising, or unique to the BNPL market. When a new type of product sees an initial burst of popularity, intrigued customers tend to flood in all at once. As time goes on, some stick around and others drop off, while familiar habits reassert themselves and the pool of eager first-time users gets shallower.
But at least two other factors could be limiting BNPL services’ growth.
First, they’re used disproportionately by some of the riskiest borrowers — those with shaky credit and household finances — including for everyday purchases, not just the occasional large expense. That may not be helping providers win over skeptics who see them as enablers of dangerous overspending. And second, the spread of installment options across the tools already in many consumers’ wallets reduces the need to sign up for a new one.
According to a NerdWallet analysis last month, the use of BNPL loans is most common among young people and parents of small kids — groups where strained finances are comparatively widespread.
More than 1 in 3 parents of minor children have used a BNPL loan over the past year, the researchers found, versus just 1 in 5 for those without young kids. The Bank of America report found nearly half of BNPL borrowers made less than $50,000 annually. And Gen Z borrowers are leaning more heavily on credit overall than millennials did at the same age a decade ago, recent data from the credit agency TransUnion shows.
Many customers of stand-alone BNPL services use them like Benjamin Espinoza, a San Antonio-based video editor in his late 20s. He told NBC News earlier this year that he’d used Klarna to pay for an Instacart grocery order when cash was tight.
“It sucks that these are the avenues I have to go through,” said Espinoza, who estimated making less than $7,000 last year.
Consumers are generally most satisfied with the BNPL plans offered by their credit card issuers.
Miles Tullo, managing director of banking and payments, J.D. Power
By contrast, mainstream brands’ BNPL riffs are likely looking to pull in higher-income users, while hanging on to existing ones who might otherwise go elsewhere to try the approach. That could create a sorting effect, with cash-strapped borrowers relying more heavily on stand-alone apps like Klarna for essentials, and more affluent ones embracing the installment features offered by name-brand companies for occasional luxuries like travel.
“Consumers are generally most satisfied with the BNPL plans offered by their credit card issuers,” Miles Tullo, managing director of banking and payments at J.D. Power, said in a report earlier this year.
But the market remains fluid. “Experiences vary quite a bit by brand and some of the newest providers are receiving the greatest increases in satisfaction scores,” he said.
Customers ranked Amex’s Plan It the top BNPL offering, the J.D. Power survey found, followed by My Chase Plan and Citi Flex Pay — all services from mainstream credit cards that typically require higher creditworthiness for borrowers to qualify. Those plans also tend to have higher purchase minimums than stand-alone BNPL services; Plan It is only available for Amex purchases over $100, for example.
Plus, as Danner pointed out, “one big factor here is you’re still able to get your rewards” when using a card’s installment feature. While some BNPL providers, including Afterpay and Sezzle, have experimented with loyalty programs, those aren’t likely to be as attractive as the ones offered by a huge Wall Street bank, Danner said.
Another upside to sticking with a credit card’s installment options: Cardholders can often use these features to circumvent interest charges. Rather than “rolling a bunch of debt into the next month at a 30% interest rate,” Danner said, “you can leverage some of these installment plans to kind of lower that total cost.”
When Gans paid for his travel on Amex, he noticed “they just sort of package it for you.” In fact, he said, there was a no-fee promotion when he first used Plan It. The service typically charges a fixed monthly rate of up to 1.33%.
Not everyone is racing to try out installment financing. Older borrowers, for example, appear to be sticking with what they know. Credit usage data that LexisNexis analyzed for NBC News shows retail store cards — whose users have long skewed older — are becoming more popular among mature consumers. In 2019, borrowers ages 60 and up comprised 20% of all retail card applicants. Last year, that share hit 25%.
Experts foresee more experimentation among lenders as the U.S. consumer population ages and as high living costs continue to squeeze many households.
“These factors collectively contribute to a rise in credit demand,” said Kevin King, vice president of credit risk and marketing strategy at LexisNexis Risk Solutions. “There’s a lot of smart people at those companies who are thinking about how to evolve their products and their businesses.”