Inflation-Weary Consumers Flock to Buy Now Pay Later Option
Years of high inflation and high interest rates have had a punishing impact on American consumers. According to the Consumer Price Index, since February 2021, consumer prices have risen, on average, a cumulative 18.8%. For many basic necessities, the increase is even greater. Food prices have risen a cumulative 21.4%, the cost of shelter has increased by 21.3% while energy prices have risen a hefty 27.4%.
This has put the American consumer in a very precarious position. To help fund their purchases, many have been forced to pull money from their savings and retirement accounts. They’ve also taken on a lot more debt. According to the Federal Reserve Bank of New York, at the end of the second quarter, total household debt had risen to a record-high $17.8 trillion. This is up $109 billion from the prior quarter and up 26% since the end of 2019. Credit card balances have risen 10.7% over the past year to a record-high $1.14 trillion.
As Americans load up on debt, one of the biggest challenges is high interest rates. According to LendingTree, the average interest rate on a new credit card is 24.84%. The Federal Reserve Bank of New York notes there are currently 599.1 million open credit card accounts, up 19% from just three years ago. 9.05% of all credit card balances are 30 days or more delinquent. This is a 13-year high and up 99% since the first quarter of 2021. Interest rates on many other types of consumer debt, such as auto loans, HELOCs and home mortgages, have also soared in recent years.
As a result, many consumers are turning to the use of Buy Now Pay Later (BNPL) services. BNPL is a short-term financing option that allows consumers to make point-of-sale installment loans for their purchases. For example, payment provider Affirm partners with major retailers such as Amazon, Walmart, Target and Apple to provide consumers a BNPL option. Other BNPL providers include Klarna, PayPal and Afterpay. BNPL providers typically offer short-term fixed loans with low- or no-interest financing.
For example, if you purchase $100 worth of goods at a BNPL participating retailer, you’ll immediately pay $25 (25%) as a down payment. Payments to the BNPL provider can be linked to your bank account. The remaining $75 will be paid off in $25 increments every two weeks, or in some cases monthly, until the total $100 purchase price is paid in full. As long as you make your payments on time, you are not charged any interest. However, if you are late or miss a payment date, you are subject to late charges and interest payments.
BNPL allows inflation-weary consumers to avoid using their high-interest credit cards. Consequently, the use of BNPL in recent years has soared. Insider Intelligence reports that 93.3 million U.S. consumers are expected to purchase $80.77 billion in goods and services using BNPL in 2024. The $80.77 billion in BNPL purchases is 12% higher than in 2023 and a 113% increase from 2021.
According to eMarketer, Millennials make up the largest group of BNPL users. In 2024, 33.6% of Millennials are expected to use BNPL followed by Gen Z (26.4%) and Gen X (21.1%). For Baby Boomers, it’s just 10.4%.
Credit cards still remain the most popular form of payment in the U.S. This year, according to eMarketer, 41% of all purchases by U.S. consumers will be via credit cards, followed by debit cards at 33%. But with consumers still facing high inflation and high interest rates, BNPL is quickly becoming a very popular option.
Mark M. Grywacheski, Investment Advisor
Quad Cities Investment Group is a Registered Investment Adviser.
This material is solely for informational purposes. Advisory services are only offered to clients or prospective clients where Quad Cities Investment Group and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Quad Cities Investment Group unless a client service agreement is in place
