The BNPL boom: The impact on consumers and the economy

The Buy-Now-Pay-Later (BNPL) market is undergoing a remarkable surge, driven by the rapid expansion of fintech companies such as Klarna, Afterpay, and Affirm.

Despite ongoing economic uncertainties, BNPL continues to gain momentum, largely due to shifting consumer behaviours and favourable financial conditions. As the sector grows, its impact on the broader economy is becoming increasingly significant.

So, what does this explosive growth mean for consumers and the economic landscape?

BNPL giants leading the charge

Klarna, a Swedish fintech firm, is one of the key players in the BNPL market. The company recently reported being “effectively break-even” in the second quarter of 2024, a major milestone as it prepares for a potential initial public offering (IPO). Klarna’s gross profit grew by 22% year-over-year, outpacing its 16% rise in gross merchandise volume (GMV). This achievement highlights the viability of profitability in the BNPL sector, even in a high-interest-rate environment.

Affirm, a U.S.-based BNPL provider, also stands out for its strong performance and future prospects. Max Levchin, Affirm’s CEO, recently projected that the company will achieve positive operating income by the fourth quarter of its 2025 fiscal year. Levchin’s optimism is bolstered by expectations of lower interest rates, which could lead to increased user engagement.

 

“The most exciting thing about the reduction in the Fed-funds rate is that we’ll have more active users and more repeat users because we’ll be able to approve more people,” Levchin said.

Meanwhile, Afterpay, another dominant player in the sector, continues to attract a younger demographic, with nearly 70% of its users falling within the 18-34 age bracket. This trend reflects the broader appeal of BNPL as an alternative to traditional credit card debt, which is becoming increasingly expensive due to fluctuating interest rates.

Why the BNPL model is gaining traction

The rise of BNPL can be attributed to its appeal to both consumers and merchants. For consumers, BNPL offers the flexibility of splitting payments into manageable, interest-free instalments, making high-ticket items more accessible without the need for traditional credit. This has proven especially popular among younger generations who are wary of accumulating debt through credit cards.

For merchants, the benefit lies in higher sales conversions. By offering BNPL options at checkout, retailers can encourage more purchases, increasing their overall revenue. Michael Linford, COO of Affirm, noted that partnerships with major retailers like Amazon are just the beginning of BNPL’s potential.

“Our partnerships are still in the very early stages. As more customers adopt this payment method and move away from traditional credit cards, we expect even more opportunities ahead,” Linford said.

BNPL’s flexibility has also made it an attractive option in a time of economic uncertainty. Rising inflation and the high cost of living have put pressure on consumers’ wallets, making BNPL’s zero-interest instalment plans an appealing alternative to high-interest credit cards.

As more consumers turn to BNPL to manage their spending, the model’s growth shows no signs of slowing down.

What’s at stake for the broader market?

As BNPL services continue to grow, their influence on the broader economy is becoming more apparent. On the one hand, BNPL encourages consumer spending, which in turn drives retail sales and boosts merchant revenues. This is particularly important at a time when traditional consumer confidence metrics are fluctuating due to inflation and economic uncertainty. By making purchases more accessible, BNPL can play a stabilising role in the retail sector, providing a much-needed boost to the economy.

However, there are concerns about the potential negative impact of rising BNPL usage. Some economists warn that increased reliance on BNPL could lead to higher levels of consumer debt. While BNPL services are marketed as a transparent, interest-free alternative to credit cards, the risk of late payments and delinquencies is growing.

Affirm recently reported that 2.4% of its monthly U.S. instalment loans were delinquent by 30 days or more, up from 2.1% the year prior. Although this increase is marginal, it raises questions about the long-term financial health of consumers, particularly if economic conditions worsen.

As one Bank of America analyst put it, “A hard economic landing would, of course, rewrite the script not just for buy-now-pay-later providers but for all kinds of lenders.”

If the economy faces a downturn, defaults on BNPL loans could spike, leading to financial stress for both providers and borrowers.

Interest rate cuts: A boon for the BNPL sector?

With central banks signalling possible interest rate cuts, BNPL companies are well-positioned to benefit. Lower rates will reduce funding costs for these firms, allowing them to offer more favourable terms to consumers while still maintaining profitability.

Affirm’s recent decision to raise its annual percentage rate (APR) cap to 36%, up from 30%, is expected to drive GMV growth and boost yields. Analysts at Bank of America pointed out that “rate cuts would be beneficial to Affirm’s funding costs and for gains on loan sales. The higher APR cap should remain a tailwind for yields and GMV growth.”

This aligns with Affirm’s optimistic projections for future growth. The company expects its GMV to increase from just under $27 billion in 2024 to more than $33.5 billion in 2025, representing a growth rate of 26% or better.

Should interest rates decline as expected, BNPL services could see even more significant gains, as higher borrowing limits would make the service accessible to a larger customer base.

The road ahead of Buy-Now-Pay-Later

The future of the BNPL sector hinges on how well it can navigate changing economic conditions. While profitability remains a key milestone for investors, the ultimate driver of success will be growth at scale.

For now, the BNPL model appears to be on an upswing, reshaping the way consumers pay for goods and services. Whether it can sustain its momentum in the face of economic headwinds remains to be seen, but one thing is clear: the sector is here to stay, and it’s poised to play an increasingly important role in the global economy.

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