The concept of “buy now, pay later” has exploded in popularity in recent years. Americans have been using this form of lending — where a purchase is typically divided into four payments over several weeks — to buy everything from clothes to Peloton bikes.
But now there is, perhaps, a more worrying trend: people are using it for smaller items like groceries.
Buy now, pay later — referred to in the payments industry as BNPL — is a new spin on the concept of layaway. But unlike traditional layaway, it allows consumers to get the product upfront, divide their payment into installments and pay it over time with little or no interest — as long as consumers pay off the loans on time. Common BNPL options include Afterpay, Klarna, Affirm
PayPal Holdings Inc.
and Zip Co.
In the first two months of 2023, the share of online grocery orders that used buy now, pay later grew by 40% compared with the same period a year ago, according to the new data released by Adobe Analytics this week.
That’s far more than the overall rise in BNPL online orders: they grew by 10% over the same period. Overall online BNPL revenue fell by 19%, meaning the average dollar amount for each order fell.
This trend may be partly due to the fact that Americans are, overall, spending more money on groceries online. Online grocery spending grew by nearly 27% year-over-year to $8.4 billion in February.
Other categories were popular for people buying now and paying later: home furnishing BNPL orders grew by 38% in the first two months of 2023 over last year, apparel grew by 8%, but electronic purchases through online BNPL fell by 14%, Adobe found.
Apparel was the largest category that consumers use BNPL for from 2019 to 2021, according to a separate survey released by the Consumer Financial Protection Bureau last September. BNPL apparel orders comprised more than 50% of all orders made using similar payment methods in 2021, the survey found.
Electronics, sporting equipment and jewelry, known as the “personal effects” in the survey, amounted to 11% of all BNPL orders. Everyday BNPL orders including food and drinks and groceries were barely 1% in 2021.
Why are people buying more groceries with BNPL?
High prices are driving consumers toward BNPL services, the Adobe researchers said. The rise in BNPL groceries orders is also a sign that consumers are buying groceries in bulk online and utilizing the special promotions, “managing living expenses in more flexible ways,” said Vivek Pandya, lead analyst, Adobe Digital Insights. The pandemic drove some groceries shopping online, she added.
Inflation rose 6% in February compared to a year ago, but grocery prices soared 10.2% over the same period, according to the latest government data. Across income levels, households are cutting back on spending and employing different ways to manage costs, such as dining out less and actively using discounts and store promotions.
So why is it concerning if more people are using BNPL to pay for items like groceries? People who use BNPL products tend to be more financially distressed than non-users, according to a March report by the Consumer Financial Protection Bureau. They’re also more likely to be an active user of other credit products such as payday loans and credit cards, the report added.
People earning $20,001 to $50,000 a year, and Black, Hispanic and female consumers tend to be more regular users of BNPL services.
Consumer advocates are concerned with the risks associated with BNPL. For starters, they are usually less regulated than credit-card services, and come with more opaque fees.
As with credit cards, if consumers don’t repay their loan on time, they can face exorbitant interest rates.
“While a pay-in-four plan doesn’t usually charge interest, longer-term BNPL plans may charge an annual percentage rate up to 30%,” Nerdwallet noted in 2022. “Fees, like for late or rescheduled payments, range from $1 to $10 and are sometimes capped at 25% of the purchase value, depending on the company.”
“If you’re struggling to pay your bills or start an emergency fund, steer clear of buy now, pay later. Because of its convenience, it’s easy to overspend with BNPL,” it added. “If that happens, you may incur high fees or be sent to collections, which will hurt your credit score.”
‘Buy now, pay later’ revenue jumped 72% last week. That’s a double-edged sword for consumers.
The buy now, pay later wave: Afterpay, Klarna, Affirm and rivals hope to take U.S. by stormBuy now, pay later vs. credit cards — which one is better for you? The answer may surprise you
Listen to the podcast: