Buy Now, Pay Later Industry In Flux Amid Inflation and Potential Recession

After seeing an explosion of adoption during the pandemic ecommerce boom, the buy now, pay later space is experiencing growing pains in the United States as consumers and investors tighten their purse strings amid a period of economic uncertainty. Swedish delayed payments giant Klarna recently saw its valuation slashed to $6.7 billion—around a seventh of its estimated worth a year ago—and it and other companies in the space have laid off portions of their workforce. The nascent industry, which has gained a foothold in the U.S. and Europe after proliferating in Asia, is facing the first test of its durability in these relatively new markets. The flux comes as inflation has made consumers more reticent about spending on the kinds of big-ticket items best suited for delayed payments. Meanwhile, recession worries and higher interest rates have rocked the tech industry as a whole, causing widespread layoffs and downsizing startup valuations. On top of all that, regulators have hinted at the possibility of reining in installment financing companies with stricter rules. Adoption holding steady Despite these challenges, Morning Consult analyst Charlotte Principato said the share of consumers surveyed by the research firm who reported using BNPL to fund a purchase in the past month has not dipped below 16% at any time this year. The widespread introduction of the payment method to American consumers over the course of the past couple years has become enough of a habit to weather some of the volatility. More Than One-Third of Americans Have Missed BNPL Payments "I believe that through a cycle of summer spending last year and holiday spending, this has now been firmly ingrained in consumers wallets," Principato said. And while higher interest rates are likely to curtail consumer spending overall, Principato said they could also drive people away from credit cards to largely interest-free alternatives in delayed payments. "That is going to make BNPL more appealing because a lot of BNPL providers are still are offering zero-interest loans," she said. "So zero is a lot better than whatever the 20% that your credit card companies are charging." Principato thinks the downgrade in the valuations of these companies has more to do with a broader correction in financial tech and overall startup markets than trends in consumer shopping. But ecommerce sales as a whole have also begun to slow in recent months as shoppers return to stores and buckle down on spending due to inflation. Salesforce's Shopping Index showed a 3% year-over-year decline in digital sales in June, the first dip in the tracker's nine-year history. Regulation could boost trust As more consumers report getting in over their head with BNPL's lending model, another challenge facing the industry is the prospect of some form of regulation. The Consumer Financial Protection Bureau opened a probe into the industry at the end of last year, and California regulators moved to bring the payment model under existing consumer lending rules. But Dana Bodine, vp of marketing at consumer reviews site Trustpilot, said reasonable regulations could ultimately help the industry to grow as consumers gain a greater sense of trust in the payment model. A recent survey from the company found that around 51% of U.S. adults say the prospect of more debt without credit reporting benefits is the main reason they don't use BNPL. Rules around credit reporting for these companies could change that. Bodine said addressing these consumer trust concerns will be essential for the industry to move beyond big-ticket purchases and become a true alternative to credit cards. "The research we're seeing is people are going to use buy now, pay later to fill up their tank and to buy milk and eggs. And that's a totally different value proposition for marketers. It's smaller ticket items," Bodine said. "Regulation can address some of that. But marketers and customer experience executives and experts at all of these financial institutions and the buy now, pay later businesses already have tools that they can go deeper and drive reputation, engage with customers and demystify the technology in the situation." Retail-Branded BNPL Is Only a Matter of Time