Key Takeaways
- Buy now, pay later tools are known for letting people break up purchases into interest-free installments.
- The companies that offer them are moving into other types of short-term loans and are offering services positioned as alternatives to debit cards and bank accounts.
- Users should be deliberate about how they approach these alternatives to credit cards, consumer advocates say.
Americans’ zeal for spending has grown the “buy now, pay later” segment into a $36 billion business.
The companies that have benefited, meanwhile, have expanded into other services, and experts say consumers should pay close attention as they consider credit-card alternatives.
The “BNPL” moniker has emerged as a description for companies like Klarna, Affirm (AFRM), Sezzle (SEZL) and Block’s (XYZ) Afterpay. The services let shoppers pay a portion of their bill and take home their purchase—with the rest of the tab generally withdrawn from their accounts in biweekly, interest-free installments.
But those same companies now offer interest-bearing loans that may last years, as well as products marketed as alternatives to debit cards and bank accounts.
“‘Buy now, pay later’ may catch your attention because it’s marketed as free,” said Jennifer Chien, senior policy counsel at Consumer Reports, a nonprofit that advocates for the public in commercial settings. But for larger purchases, she noted, providers may suggest interest-bearing versions— “and you may not, as a consumer, really be focused on that because you were expecting it to be fee-free.”
What to Know About BNPL Growth and Offerings
Americans flocked to BNPL platforms during the pandemic, but growth has since slowed. The volume of BNPL applications grew 20% from November 2023 to 2024, though most inquiries were from repeat users, according to LexisNexis Risk Solutions, which performs risk assessments for BNPL providers.
BNPL providers initially made money by charging merchants that wanted to embed their technology in check-out software as a way to boost sales, analysts said. Now that these businesses’ service offerings have widened, though, consumers should keep the following in mind:
- Companies may offer payment plans that come with interest, though rates are generally better than those offered by traditional lenders, according to Kevin King, vice president of credit risk at LexisNexis Risk Solutions.
- Plans may charge late fees, which can add up if BNPL providers make multiple failed attempts to withdraw funds. This may trigger overdraft fees from users’ banks, Chien said.
- Applications for some payment plans may involve a “hard credit check,” which can impact your credit, Chien said. The sector has a mixed track record of reporting repayment progress to the three credit reporting agencies, she added.
Where BNPL Providers Are Headed Next
With new user growth tapering off, BNPL providers are looking for new services to sell to their clientele, analysts said.
Affirm, Afterpay and Klarna have launched apps that show users which payment plans they qualify for, and connect them with places to spend the money. For example, you can browse shoes in Afterpay’s app, select a pair and then be directed to Amazon or other stores to complete the purchase with or without a BNPL product.
This opens up new potential revenue sources, including charging merchants to advertise in the app, collecting referral fees for external sales that originated on the app; and selling insights on consumer behavior, Chien said.
The big BNPL players are also making a play for more traditional financial services, including debit cards and bank accounts.
Affirm offers “money accounts,” where money is directly deposited and held by Cross River Bank, an FDIC-insured institution, the company said. Klarna’s “balance” product doesn’t appear to be affiliated with an FDIC-insured institution. Users of such products should note, Chien said, that even if a service works with an FDIC-backed institution, money can still be lost if it hasn’t been properly deposited with the bank and a fintech partner fails.
The Klarna offering is “primarily designed for consumers to receive cashback and access refunds faster,” spokesman John Craske said, adding that Klarna is a licensed bank in Sweden that “operates under stringent financial regulations.”
Affirm updated investors on its strategy during a quarterly earnings conference call on Feb. 6; Block is slated to release its earnings Feb. 20; and Sezzle is scheduled to hand in numbers on Feb. 25. Privately-held Klarna has begun the initial public offering process, submitting a confidential filing to the Securities and Exchange Commission.