Consumers wallets are pinched, a perfect storm for Buy Now, Pay Later platforms

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Consumers are eager to fill up their stockings, even if they don’t have the means to do so.

During Cyber Week — the five-day period between Thanksgiving and Cyber Monday— shoppers spent $940 million using buy now, pay later (BNPL), a 42.5% jump compared to last year, per Adobe Analytics’ data on e-commerce.

Consumers have been battling headwinds all year, as high interest rates, the return of student loan payments, and sticky inflation weighed on their budgets. BNPL, which allows payments to be split into equal installments, saw record demand, even before the holiday began.

The payment solution is now being used for everything from discretionary items like apparel and furniture to gas and groceries.

For the first eleven months of the year, from January 1 to Dec. 6, consumers spent a total of $64.9 billion dollars using buy now, pay later platforms, according to Adobe Analytics, up 15% from a year ago. The global market for BNPL is projected to grow from $309.2 billion in 2023 to $565.8 billion in 2026, per GlobalData.

Shares of BNPL provider Affirm (AFRM) is up roughly 70% in the past month and 375% on the year, after shedding more than 90% of its value between November 2021 and January 2023.

The uptick is a welcome change for the payments industry, which has had a tumultuous 2022 as the fintech boom faded and issues, such as spending pullback and consumer delinquencies, cropped up. While plans typically don’t charge interest for pay-in-four options, longer term financing can have APRs of up to 36%, reported Nerdwallet.

However, the industry has plenty of potential, as there are a variety of ways for firms to make money besides interest on loans. For one, Affirm can get a cut of transactions from merchants for help facilitating the sales.

If you buy a $100 item, Affirm may only have to pay the merchant $95, pocketing the $5 difference, Mizuho analyst Dan Dolev told Yahoo Finance over the phone.

Affirm also issues a debit card that earns interchange fees, sells a portion of its loans to third-party investors, among other services.

In a few years, BNPL will only be one component of Affirm’s business, Dolev added.

Affirm is the leader of the pack

BNPL can be alluring for consumers: No late fees, deferred interest, or compound interest, depending on the provider.

“These loans are closed and fixed, can’t revolve and they’re safer for consumers because they always had an end, unlike credit cards, which are really designed to keep consumers revolving for a very long period of time.” Affirm CFO Michael Linford told Yahoo Finance.

As credit card balances grow — it’s up 4.7% to $1.08 trillion in Q3, according to Moody’s Investor Service — there will be more opportunities for the company. Affirm underwrites loans by looking at each borrower’s financial health to ensure they can repay down the line, said Linford.

“We’re in the early days of buy now pay later adoption,” said Dolev. The platform checks whether consumers can make the payments for each item purchased, making it less risky than a general line of credit like credit cards.

Affirms is “obviously” leading the pack with the “most noticeable uptick” in usage, according to Dolev, while Block (SQ), which owns Afterpay, and others are “not even close.”

In fiscal Q4, Affirm had 16.9 million active customers, with 91% of transactions from repeat customers. Revenue for the company has jumped three times since fiscal year 2020, to over $1.5 billion.

Meanwhile, AfterPay saw transactions increase 19% year-over-year during Black Friday through Cyber Monday weekend. Klarna also saw a 29.5% increase in orders compared to last year on Black Friday among US shoppers.

But the field is getting more competitive. PayPal (PL) also offers buy now, pay later, while Apple (AAPL) introduced its own version in March.

Unclear path to consistent profitability, increasing competition, a slowdown in e-commerce spending, credit quality performance in case of a recession, and increasing funding costs in a higher interest rate environment are among reasons that WedBush rates the stock as underperform, according to analysts David Chiaverini and Brian Violino.

However, Affirm benefits from brand recognition and advanced underwriting abilities.

Truist Securities analyst Andrew Jeffrey sees “Affirm as the chief beneficiary of BNPL adoption, driven by enterprise customers, best-in-class tech integrations and Affirm Card [total addressable market] expansion,” per a client note.

Retailers could be beneficiaries of BNPL

With more services like this being offered, what does this mean for consumers at the end of the day?

“More spending, increased sales, greater financial inclusion,” Shannon Seery Grein, Wells Fargo Economist told Yahoo Finance over the phone.

There is “limited data” on BNPL companies, added Grein. Based on a Consumer Financial Protection Bureau report in March, shoppers using the service tend to have a household income between $20,001-50,000, which is a “more vulnerable” population, Seery Grein said.

“If households just rely on buy now, pay later more and more, and start to piece together all the small payments … you’re kind of backing into a larger balance [eventually], said Grein.

The service is just the latest “tool” to get consumers to spend, Howard Meitiner, former Sephora USA CEO and current managing director at Carl Marks Advisors, told Yahoo Finance over the phone

BNPL is a boon for retailers when wallets tighten, allowing shoppers at anywhere from Walmart (WMT) and Amazon (AMZN) to Home Depot (HD) and Target (TGT) to purchase goods they can’t afford at the moment. However, this could mean pressure on the consumer later, particularly after big shopping seasons like the holidays.

“Consumers really need to ask themselves” if they need a product or service and while they think they might be able to make payments, if an unexpected bill comes in, they could have a problem paying it off, advised Meitiner.

Brooke DiPalma is a senior reporter for Yahoo Finance. Follow her on Twitter at @BrookeDiPalma or email her at [email protected].

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