New record numbers for buy now, pay later show that consumers aren't spooked by the emerging payment method that some economists call “phantom debt.”
U.S. shoppers generated $16.6 billion in buy now, pay later transactions during the holiday season, helping to cap off a big year for the flexible payment option.
That's according to Adobe Analytics, which noted a 14% increase in buy now and pay later transactions during the holidays in a report released Thursday. Over the course of 2023, BNPL spending also rose about 14% to $75 billion.
These numbers represent a bold win for the emerging payment method. But some economists worry about the lack of clarity about the full size of the industry and the financial health of BNPL users.
BNPL services allow shoppers to split purchases into instalments, with some interest-free options. Consumers typically make payments over four to six weeks, but some plans allow longer payment schedules. The payment method has risen in popularity, first being adopted among younger, lower-income consumers, then expanding to include a wider range of shoppers.
“I'm surprised that's all the increase,” Tim Quinlan, chief economist at Wells Fargo Economics, said of the 14% year-over-year rise in BNPL spending.
Quinlan and Shannon Seery-Green, an economist at Wells Fargo Economics, recently called buy now, pay later “phantom debt.”
Quinlan and Green noted that there is “no final action” yet on the full extent of BNPL use. Until that happens, they wrote, “there is no way to know when this phantom debt could create significant problems for the consumer and the broader economy.”
For context, the dollar volume of loans from the largest companies in the industry jumped to $24.2 billion in 2021 from $2 billion in 2019, according to the Consumer Financial Protection Bureau. That's a rise of 1,092%.
“I don't think there's anything inherently wrong with BNPL programs,” Quinlan told MarketWatch on Thursday. There are positive aspects, including increased purchasing power for consumers and greater inclusion for people who may not have credit cards, a good credit history, or an established banking relationship.
But he worries about the potential for overspending if people “indulge into complacency” with “small payments that add up to a big problem.” Another concern, he added, is limited transparency in an industry that has little regulation and oversight.
Given this context, it's difficult to say what the increasing use of BNPL shows about consumer health right now, Quinlan noted.
Wall Street and policymakers, such as the Federal Reserve, are focused on consumers' financial well-being as they watch for a “soft landing” that avoids a recession after a bout of extreme inflation and sharp rises in interest rates. Americans have $1.08 trillion in credit card debt as of the third quarter of 2023.
“In an uncertain demand environment, retailers have relied on discounting and flexible payment methods to entice shoppers this holiday season,” Vivek Pandya, senior analyst at Adobe Digital Insights, said in a statement Thursday.
Growth in online holiday spending through BNPL methods outpaced growth in overall online spending during this period, with Adobe calculating a roughly 5% increase in overall online spending from the beginning of November to the end of December. This amounted to $222 billion in spending.
More than half of that came from five categories: electronics, apparel, furniture, groceries and toys.
Investors appear to have noticed BNPL's momentum in 2023, with shares of Affirm Holdings Inc. AFRM,
It increased by more than 400% during the year. Granted, this rally came after a 90% decline during 2022, and the stock is down to start 2024 as well.
“We guarantee every single transaction and only approve consumers for what we believe they are willing and able to pay. And because we don't charge any late or hidden fees, our success is aligned with consumers' success in managing their finances.
The company says it is advocating for BNPL to be included in credit reports so consumers can build up their credit scores and lenders can get a full view of a person's debts.
Regulators, such as the Consumer Financial Protection Bureau, have also been monitoring BNPL's momentum.
There are many BNPL users who use the payment method “without any noticeable signs of financial stress,” CFPB researchers wrote last year in an analysis of consumer survey responses.
However, compared to people who did not use BNPL methods, the report said BNPL users more often said they were in debt, carried credit card balances and used high-interest financial services such as payday lenders.
The major credit reporting companies admit there's still a way to go.
Equifax EFX,
The credit reporting company began including “buy now, pay later” loan payment information in U.S. consumer credit reports starting in February 2022, the spokesperson noted.
BNPL reports can help strengthen a consumer's financial situation and serve as a “stepping stone to other types of credit.”
“Equifax continues to engage with BNPL with a focus on ensuring that the inclusion of BNPL data in consumer credit files has a predictable impact on credit scores,” the spokesperson said. “BNPL is an emerging payment type in the US, and although there is an initial volume of BNPL loans, they are not widely reported at this time.”
experian XP,
He made a similar point.
“The practice of reporting BNPL data is currently limited; however, Experian is working with partners in the BNPL industry to make this data more accessible to customers and consumers,” the company said in a statement, noting its longstanding support for including data that builds consumers' credit profiles.
Experian said its goal “is to enhance transparency in the BNPL industry, leading to improved support for consumers and risk management for lenders.”
Related: Is America's record credit card debt a red flag for the economy? “The trends are definitely not good.”
