Completing a transaction with a credit card remains the most prevalent payment option for consumers nationwide. However, relying on credit as a primary payment method has some drawbacks: even missing so much as one payment can seriously impact your FICO score.
However, there are growing alternatives to credit reliance, one of which is Buy Now, Pay Later, or BNPL. Thanks to Generations Y and Z, Buy Now, Pay Later has become an increasingly popular alternative to traditional credit routes.
Key Takeaways:
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What is Buy Now, Pay Later?
Buy Now, Pay Later is a form of installment loan in which customers can pay for a product or service in fixed increments with no accrued interest or added fees. Installment amounts are pre-established and can be set via BNPL apps such as Affirm or Klarna. Customers can only exercise BNPL as a payment option at participating retailers or storefronts.
There are exceptions to this standard as it applies to interest. In other words, select BNPL programs may accrue interest or related charges, though most do not. Opting into BNPL may also require the user to submit to a soft credit check, though a hard inquiry has a greater potential to impact a customer's credit score. By and large, customers using BNPL to make a purchase can do so in three to four pre-set increments.
Using BNPL
A customer can opt to use Buy Now, Pay Later at checkout. In this scenario, said customer completes the initial transaction before paying fixed rates in a series of interest-free installments. The lack of interest is a significant source of appeal for regular BNPL users. This appeal stands in stark contrast to credit cards, where interest is charged in the case of unpaid balances. However, it bears repeating that customers interested in the BNPL alternative can only exercise this option at participating businesses.
There is a not-unfounded preconception that basic money management is more of a burden for younger generations, specifically Y and Z. For instance, making a one-time payment of $1,000 would present more of a potential liability than paying in four one-time installments of $250 for these demographics. With this context in mind, the appeal of the Buy Now, Pay Later system is readily apparent.
However, there are some downsides to consider. Although BNPL remains desirable for its lack of fees, some programs will charge fees if payments are not made on time. Similarly, while BNPL ultimately has a minimal effect on a consumer’s credit report, missing a payment outright may result in a consumer’s credit bureau being notified, which can present a whole new set of problems.
Buy Now, Pay Later: A Study
J.D. Power recently surveyed upwards of 4,300 North Americans in the Generation X, Y, and Z demographics. However, it could be argued that Generations Y and Z were most critical for the study in question. Gen Y comprises individuals born between the late 1970s/early 1980s and the mid-1990s; these individuals are more often than not referred to as millennials. The subsequent generation, Gen Z, encompasses those born between the mid-1990s and mid-to-late 2000s.
The study estimated that about 42% of Generations Y and Z prefer BNPL over traditional credit options. Part of the reason for this is that a system like Buy Now, Pay Later may seem more appealing in times of rampant inflation or economic instability. In contrast, over 29% of Gen Xers who participated in the study opted for Buy Now, Pay Later programs—a rift that says a great deal about generational financial trends.
The J.D. Power study cited a score of 627 out of 1,000 for millennial participants, indicating that Gen Y'ers who partook in the survey enjoyed the greatest customer satisfaction with BNPL services. Narrowly following Generation Y in this study was Generation X, with a score of 620 out of 1,000, with Gen Z coming in at 617 out of 1,000.
What can we learn from these numbers? The most apparent point is that certain millennials are the most likely to trust BNPL as an alternative to established credit options. The statistics regarding Gen X are a bit of a curveball. Since certain members of Generations Y and Z grew up saddled with assorted forms of debt (not to mention a collective wariness of the complications that can come with establishing credit), it is somewhat curious that members of Generation X expressed greater satisfaction with BNPL as a practice as per this specific study. While the study indicates that younger generations are more likely to go with BNPL as a viable credit alternative, Generation X has proven, via the J.D. Power survey, that they can adapt to changing financial customs just as much as their youthful counterparts.
How Younger Generations Are Spending
BNPL has become a desirable go-to payment method for millennials and Zoomers looking to pay for increasingly costly living expenses such as groceries and household utilities. Inflation and the rising cost of everyday essentials are real concerns for younger consumer demographics, thus prompting them to seek less traditional payment alternatives. Generations Y and Z are also more likely to go with trusted legacy brands with a proven track record of assisting their customers (see our Key Takeaways section, specifically the mention of Citi Flex Pay and Plan It by American Express). It makes sense: if you were selecting a BNPL option, would you choose a well-trusted brand or a lower-tier option with less skin in the game?
Federal Compliance and Interest
Despite the evident appeal of Buy Now, Pay Later for younger demographics, some recent changes to BNPL practices may continue to influence consumer behavior or cause it to chart differently. As of May 22, 2024, the Consumer Financial Protection Bureau announced that BNPL firms must comply with federal regulations related to refunds, returns, merchant disputes, and bill-related fee disclosures. It is also worth noting that Buy Now, Pay Later arrangements typically do not incur interest if the payment is submitted promptly and in the appropriate installments. However, as mentioned earlier, there are longer-term exceptions to this rule.
Why Is BNPL Catching On With Younger Generations?
Per the J.D. Power study, Senior Director of Banking and Payments Sean Gelles says, “Generations Y and Z are attracted to Buy Now, Pay Later services due to their competitive repayment terms.” Gelles also quotes “the desire to defer payment on a purchase” as the second most frequently cited reason for the younger generation's attraction to Buy Now, Pay Later. While it would be somewhat reductive to claim that younger generations are fully rebuking credit in favor of BNPL, there are certain external factors (high spending patterns around the holiday season, for example) that may contribute to specific concentrated patterns in which Buy Now, Pay Later is seen as the more attractive option.
There are several reasons why younger consumers are drawn to the concept of BNPL. It is efficient, relatively easy to navigate from a conceptual standpoint, and comes with less baggage than the routine use of credit cards. There is also the notion that certain members of Generations Y and Z are moving away from traditional payment systems and towards more mobile or cutting-edge solutions; in other words, they may be less attracted to physical cards and, therefore, compelled to seek out less conventional alternatives.
In Conclusion
It is essential that business leaders look to the youth to see what direction the culture is headed in. This notion applies to many facets of contemporary life, not just payments. Younger people tend to lead the way in terms of trends and innovation. At the same time, it might be a stretch to claim that Generations Y and Z are entirely leaving credit behind; surveys like the one conducted by J.D. Power indicate that specific factors are compelling members of these generations to seek out workable substitutes.
Of course, certain younger people’s skepticism towards credit does not mean that credit is going anywhere or that BNPL will eventually replace credit as the dominant payment method for most consumers. It simply means that more forward-thinking generations are actively seeking more forward-thinking payment solutions that older consumers may consider unorthodox.
The bottom line is that BNPL is here to stay, and Generations Y and Z are a huge part of the reason why.
