The holiday season is expected to be dominated by the “buy now and pay later” trend (BNPL), with predicted spending up 11.4% from last year.
Adobe Analytics reports that consumers are expected to use BNPL to buy $18.5 billion in goods from November 1 to December 31. This includes $993 millions on Cyber Monday.
Source: Adobe Analytics
BNPL is a very popular service, especially among young shoppers who have a limited credit record.
What is driving the BNPL boom in Australia?
The rise in popularity of BNPLs has been fueled by a mixture of changing consumer tastes and economic pressures.
These services are especially attractive to younger consumers such as Gen Z, millennials and Gen Z, because they bypass the traditional credit check and do not impact credit scores.
Alternatives to credit cards include providers such as Klarna Afterpay and Affirm, which offer loans for a short period of time with little or no interest.
Experts in financial planning warn that there are risks associated with these plans.
Customers who use credit cards to pay for BNPLs may be charged compounded fees and interest.
Financial advisors emphasize the importance of spending wisely, especially since credit card debt for the younger generation has increased by over 50 percent since March 2022 when the Federal Reserve started to raise interest rates.
Merchants enjoy a sales increase as BNPL increases cart size by 20%
Retailers are embracing BNPL as it encourages larger cart sizes.
According to research by the Federal Reserve Bank of New York, shoppers are spending an average of 20 percent more money when BNPL is available.
This makes BNPL a valuable tool for retailers who want to maximize holiday revenues during a difficult economic period.
The psychological appeal of BNPL may lead consumers to take on too much debt.
Buyers often feel more money available when they perceive smaller payments spread out over time. This leads to additional purchases.
This behaviour has been flagged as a potential risk by consumer watchdogs, especially when using multiple BNPL services simultaneously without centralised reporting.
Regulation safeguards
BNPLs are being closely regulated.
The Consumer Financial Protection Bureau mandated in May that companies must adhere to similar regulations to traditional credit.
Consumers are offered additional protection by providing refunds, a way to dispute transactions and avenues to contest them.
Despite all of these steps, not paying a BNPL can have serious consequences.
Late fees, interest or the inability to use the service again are all possible penalties.
Experts in financial management advise shoppers to plan their payments carefully to avoid financial stress during the holiday season.
Economic Challenges
BNPL offers a great solution for holiday shopping in a period of uncertainty.
The use of revolving credits is on the rise, as inflation continues to reduce purchasing power.
LendingClub, a financial services company, points out that BNPL consumers often underestimate the real cost of their expenditures. This leads to long-term credit accumulation.
Deferred payment encourages greater spending by retailers.
The growing popularity of BNPL as a tool for financial planning raises concerns about its long-term sustainability.
Risks and Rewards
The BNPL is convenient and flexible, but it can also pose risks to consumers who are not prepared.
Credit cards should not be used to pay for BNPLs, because they can compound interest.
Those who fail to keep track of their BNPL contracts may also face financial hardships.
Consumer advocates urge shoppers to be financially literate to make the most of BNPL.
Understanding the mechanics of the services and their potential pitfalls will become increasingly important for consumers as well as merchants.
The payment method is expected to be used by consumers to the tune of $18.5 billion during this holiday shopping season.
Financial education and responsible use is becoming more important as younger generations adopt flexible spending.
Retailers are using the trend as a way to increase sales. They highlight the impact of BNPL both on the consumer and the economy.
The latest updates may alter the severity of this post-Gen Z debt crisis as services that allow you to pay now and later soar.
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