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A payment alternative that rivals traditional credit cards
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The buy now, pay later (BNPL) concept dates back to the 19th century, when companies and department stores offered consumers installment plans for purchasing big-ticket items like furniture, farm equipment, and other frequently out-of-budget goods. In the 1890s, Singer Sewing Machines popularized the “dollar down, dollar a week” payment plan.
In this guide, we outline the current state of BNPL, its growth drivers, key players, and profitability tactics as user adoption levels off.
Since the early 2010s, BNPL’s digitalization has allowed consumers to pay off their online—and increasingly in-store—purchases piecemeal. An alternative to traditional credit cards, when a BNPL method is used, the purchase price is divided into smaller, more manageable segments. The consumer then pays a set monthly installment until it is fully paid off. For instance, if an item costs $24, the BNPL solution breaks down the payment plan into four monthly payments of $6.
Using a BNPL option acts like a personal installment loan, and is often interest-free when payments are made on time and in full, according to Forbes Advisor. If payments are missed, there could be an additional charge for the late payment.
Consumers do not need a certain credit score to use a BNPL service, though some providers will run a soft credit check through a credit bureau to understand a user’s credit history.
A type of payment technology within the fintech industry (which combines financial services with technology), BNPL drew widespread adoption during the COVID-19 pandemic. During the height of the pandemic, consumers with tighter wallets looked for alternative funding methods, with many flocking to major providers like Klarna, Afterpay, and Affirm. Since then, Big Tech companies like Apple have gotten in on the BNPL action.
In 2024, EMARKETER forecasts 93.3 million US consumers will use BNPL services. Users will continue to increase annually through 2027, though growth will taper due to increased competition.
Though not as prevalent as credit cards (70%), debit cards (60%), or PayPal (43%), BNPL was used by 14% of US digital buyers to make a digital purchase in December 2023, according to an EMARKETER survey conducted by Bizrate Insights.
As consumers look for credit card alternatives to avoid accumulating debt, BNPL has emerged as an appealing way to complete a purchase due to its ease and flexibility of use that blends the benefits of credit, short repayment terms, and app-based shopping.
In 2024, total BNPL spending in the US will grow 12.3% YoY to $80.77 billion, according to our July 2023 forecast.
Compared with credit cards, BNPL providers like Klarna, Afterpay, and PayPal offer lower- or no-interest funding.
However, like a credit line, BNPL encourages consumers to keep spending due to the service’s convenience, even if doing so isn’t always financially sound.
During the 2023 holiday season, US shoppers used BNPL plans in $16.6 billion worth of purchases, a 14% YoY volume increase, per Adobe Analytics data from November 1 to December 31.
Demand for BNPL was particularly strong during Cyber Five.
US consumers who paid using BNPL options spent 48% more on Black Friday than shoppers using other payment methods, according to PYMNTS Intelligence. On average, BNPL users spent about $600 while non-BNPL users spent closer to $450.
On Cyber Monday alone, consumers used BNPL to pay for $940 million worth of online purchases, Adobe Analytics found. A 42.5% YoY increase, Cyber Monday was the biggest spending day for BNPL to date.
The popularity of BNPL purchasing during the 2023 holidays is indicative of consumers’ concerns about their finances due to inflation and economic uncertainties. Almost half (48%) of consumers surveyed by Deloitte planned to cut back on holiday spending in 2023.
Nevertheless, credit cards remained the top payment choice, with 62% of consumers planning to cover costs in this way, per a September 2023 PYMNTS and i2c survey. Gen Z, however, was more likely to pay for holiday expenses via BNPL.
About 39% of Gen Zers in the PYMNTS and i2c survey planned to use BNPL during the 2023 holidays. In comparison, 21% of Gen Xers and 9% of baby boomers planned to do the same.
As a response, BNPL providers like Klarna and Afterpay ramped up their shopping features ahead of the holidays to capitalize on increased spending.
At the start of 2024, US consumers began to feel better about inflation and consumer buying power slowly started to recover. But despite optimism, consumers’ financial health may not be what it seems.
In November 2023, credit card debt increased by $23.7 billion, or 5.7% YoY, per the Federal Reserve. When seasonally adjusted in December, consumer credit card debt increased at an annual rate of 0.4%.
In addition, consumers may be understating their debt due to BNPL use. Since many BNPL lenders don’t provide their data to credit reporting agencies, a true evaluation of US consumers’ outstanding debt is difficult to calculate.
With that said, we forecast that BNPL’s total payment value will reach $80.77 billion in 2024. Likewise, 11.2 million new consumers will try alternative payment methods over 2023.
During an episode of EMARKETER’s “Banking and Payments Show” podcast, our senior research analyst Grace Broadbent touched on the factors driving BNPL growth.
“Acceptance is growing. There’s new use cases. More demographics are getting involved,” Broadbent said. “Despite [nearly] two-thirds of users being millennials and Gen Z, I do think we are seeing a lot more older users begin to use BNPL.”
In 2024, 32.6% and 15.3% of the US Gen X and baby boomer population, respectively, will use BNPL to make a purchase, per our June 2023 forecast.
Our principal analyst David Morris agreed with Broadbent, stating, “I think there’s definitely a general use case expansion. And baby boomers—the growth is smaller there, but I think that’s almost more notable because they’re so far removed from this digital age when you’re comparing them to Gen Z.”
As adoption transcends generations, BNPL providers will need to begin marketing their services using a wider net.
Millennials (36.0%) will use BNPL at a higher rate than other generations in 2024, according to EMARKETER’s June 2023 forecast. Likewise, as a digital-savvy generation, millennials have also embraced digital payment solutions like mobile wallets. Nearly 45 million millennials will use proximity mobile payments in 2024, more than any other generation, according to EMARKETER’s April 2023 forecast.
Despite popularity among millennials, Gen Z will outpace millennials in the coming years to become the primary growth driver for both digital payment methods. Proximity mobile payments fit seamlessly into Gen Z’s digital-native lifestyle, and BNPL is appealing due to its user experience and app-based shopping features.
In 2024, EMARKETER forecasts that 32.8 million Gen Zers will use mobile wallets, and 43.4% of the generation will use BNPL. By 2027, Gen Z’s adoption of both payment methods will just about match up with millennials’ use.
“A lot of Gen Zers are jumping onto BNPL because they either don’t want to embrace traditional credit cards or don’t have the credit yet,” said our senior analyst Arielle Feger on an episode of the “Behind the Numbers: Reimagining Retail” podcast. “I think that there’s going to be an increase in how they use [BNPL services], especially with the tough economic climate and budgets.”
As Gen Z catches up with millennial usage, mobile wallet providers can lean into the super app model to meet users’ expectations.
Wallet integrations include BNPL services, support of student ID cards, event tickets, loyalty programs, and more. Use cases like these can appeal to mobile wallet holdouts and strengthen user-provider relationships.
Despite mobile wallet integrations, most BNPL use occurs online. To continue BNPL’s growth trajectory, providers will need to convince shoppers, particularly older generations, that in-store BNPL solutions can offer the same ease of use and convenience.
In-store retail sales will exceed $6 trillion in 2024, while $1.217 trillion will be spent on ecommerce purchases, according to our February 2024 forecast.
Physical retail continues to be the primary way consumers shop. “By the end of 2026, brick-and-mortar will still account for $4 of every $5 spent in retail,” according to EMARKETER’s Gen Z Consumer Payment Habits report.
In order for BNPL providers to make headway in physical retail, the payment method needs to be accepted at the point of sale (POS). As proximity payments increased, retailers have updated their POS systems to accept options like Apple Pay in order to streamline purchases and make transacting easier.
BNPL will need to undergo a similar in-store transformation. If BNPL is a readily available in-store payment option, the likelihood of current users—and those new to BNPL—choosing to complete their transaction this way may increase.
However, as of December 2023, interest in using BNPL at checkout is mixed at best.
In an EMARKETER survey conducted by Bizrate Insights, 13% of US adults said they use BNPL in-store regularly, while roughly 20% said they haven’t used it to complete a purchase, but would be either very or somewhat interested in trying it out.
Another 18% said that while they’ve used BNPL before, it’s not something they do regularly. It may be that these respondents reserve BNPL for big-ticket items, use it based on budget constraints, or have tried BNPL only out of curiosity.
Although digital payment availability—including retail app purchases, Apple Pay, and BNPL for in-store buys—can increase shopping occasions and basket sizes, it may be difficult to convert the majority of shoppers.
One way to capture a larger share of the in-store market may not be to go all in on digital payments, but instead, embrace traditional methods like credit cards: 73.9% of all in-store transactions are card-based, per our August 2023 forecast.
Take, for example, BNPL provider Affirm and its branded Affirm Card. The Affirm Card is a Visa debit card that gives cardholders the flexibility to pay over time with BNPL or pay in full for eligible purchases, according to Affirm.
During Affirm’s fiscal year Q1 2024 earnings call (for the quarter ending September 30, 2023), the company reported:
To further illustrate in-store retail’s potential, EMARKETER reported that active Affirm Card users in fiscal year Q4 2023 (ending June 30, 2023):
In addition, only 51% of card transactions bore interest.
In a physical retail setting, the “just charge it” consumer mindset may help Affirm and other BNPLs maintain growth. It’s also a likely way to court shoppers who may be wary of using BNPL when shopping online.
“It’s debit that’s going to make [the case for in-store],” said Morris on the aforementioned “Banking and Payments” podcast episode. “[We] have all of these BNPL providers that now have debit card offerings and they’re trying to get those in the hands of users.”
In addition to encouraging in-store use, BNPL providers should also focus on influencing online behavior.
To sway payment behavior, it’s common for an online retailer that accepts BNPL to display the partner service’s logo on the product page. This is often placed below the item’s price, and shows the number of installments and cost breakdown. By promoting BNPL early on in the path to purchase, the consumer is then aware that it’s an option as they shop.
Although subtle, letting consumers know that BNPL is accepted ahead of the actual payment page may encourage the consumer to finalize the purchase, especially if it’s outside their budget. Consumer awareness of BNPL providers may also increase from visibility on the product page.
In an attempt to become end-to-end shopping hubs, BNPLs are also encouraging use within their own apps. Within these apps, affiliate marketing has become part of providers’ strategy to increase use and help profitability become a reality.
Klarna, for example, has leaned into affiliate marketing. The strategy is paying off thanks to the popularity of its shopping app, which, in addition to its shopping, payment, and budget features, offers AI-powered product recommendations, live personal assistants, and more.
“About 70% to 80% of sales on the Klarna app originate through the search function,” according to Sifted as reported by EMARKETER. “It’s likely that affiliate merchants are willing to pay for higher search result placement and to be featured in things like push notifications.”
This high-margin opportunity is likely to catch on with other BNPL providers as they pivot from growth-at-all-costs strategies to focusing on profitability. As such, affiliate marketing revenues will become necessary to operate in a crowded space.
Despite BNPL’s rise in popularity among younger demographics, the payment solution has faced scrutiny. Tension has built between BNPL firms and traditional banks, resulting in calls for oversight.
In 2022, a joint study by Barclays and StepChange Debt Charity found that 1 in 3 UK consumers who have used BNPL say it put them into “unmanageable debt.”
At the time of the study, Klarna’s then-UK head, Alex Marsh, criticized the findings as “irresponsible” because of Barclays’ vested interest in “their high-cost installment credit product.” Banks may also view BNPL as a threat to their dominance on lending.
Nonetheless, the UK government responded by outlining regulations for the BNPL industry.
Similar US regulations, akin to those intended to protect consumers from credit card issuers, are being spearheaded by the Consumer Financial Protection Bureau (CFPB).
Although no regulations have been put in place as of the beginning of 2024, the CFPB’s 2022 report outlined BNPL’s growth and its potential risk to consumers.
Following its yearlong investigation, the report underscored concerns about:
Like the credit card industry, the BNPL ecosystem is a crowded space, with many providers offering similar services and working alongside the same retail partners.
In 2024, Klarna’s 42.8 million US users will generate $21.99 billion in BNPL payment value, with an average of $513.47 spent per user, according to our June 2023 forecast. Klarna is expected to surpass Affirm in payment value by 2024.
Klarna’s success has been attributed to the popularity of its app; credit card; omnichannel approach; and colorful, celebrity-endorsed marketing. Klarna’s campaigns have featured Lady Gaga, A$AP Rocky, and, most recently, a 2023 spot with Paris Hilton.
To stay competitive, in January 2024, Klarna launched a US subscription service, Klarna Plus. For $7.99 per month, users can have their BNPL service fees waived, earn double reward points, and have access to exclusive deals such as discounts at retailers like Nike and Instacart.
Affirm’s market share of $20.16 billion is slightly smaller than that of Klarna.
However, Affirm users’ spending is more than double Klarna users. In 2024, EMARKETER forecasts that Affirm’s 16.4 million users will each spend an average of $1,227.34.
Affirm credits its positive performance to the Affirm Card. To start off its fiscal year 2024 (ending September 30), the company highlighted the Affirm Card’s growth, which saw its GMV total $224 million for the quarter.
The BNPL provider has also inked partnerships with Booking.com and vacation rental company Evolve. Travel is a quickly growing BNPL segment as more consumers use BNPL to finance their trips.
In 2024, Afterpay will achieve $9.16 billion in US payment value. Its users will spend an average of $474.14 each.
Although the smallest of the three main BNPL providers in terms of payment value and individual spending, Afterpay still has 19.3 million users, per our forecast.
To keep up with its competitors, Afterpay has embraced AI-powered tools to enhance the in-app shopping experience through personalization, which may lead to larger cart value.
Mobile wallet providers like Google and Apple have also looked to capitalize on users’ BNPL interest.
In late 2023, Google announced that it had integrated BNPL options from Affirm and Zip into its mobile wallet. Google Pay will continue to add more BNPL partners in the future.
Doing so will help Google Pay improve its standing among competitors and bring its digital wallet more payments volume. Per an April 2023 forecast, 36.4 million people will use Google Pay in 2024, representing 14.6% of smartphone users.
As part of its larger financial ambitions, Apple began rolling out its BNPL offering Apple Pay Later to some of its 55.8 million US Apple Pay users in March 2023.
Nearly a year later, in February 2024, the company announced that eligible Apple Pay Later users must apply to use the BNPL service. Apple Pay Later is available for purchases between $75 and $1,000 made on iPhone or iPad devices and where Apple Pay is accepted, per the company.
Like Apple, PayPal has launched its own proprietary offerings. The fintech introduced a Pay in 4 offering in 2020 and a Pay Monthly option in 2022.
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