How 'Buy Now, Pay Later' is Shaping Holiday Shopping in 2024 Amid Inflation and Credit Debt

How 'Buy Now, Pay Later' is Changing Holiday Shopping Amid Inflation and Credit Debt

As inflation continues to strain American wallets and credit card balances hit record highs, the allure of "Buy Now, Pay Later" (BNPL) services is stronger than ever. This holiday season, more shoppers are turning to these payment plans as a way to spread out costs, making big-ticket items seem more attainable without the upfront financial hit.

A Surge in Holiday Spending

According to Adobe Analytics, BNPL spending is projected to reach $18.5 billion during the holiday period from November 1 to December 31, a significant 11.4% increase from last year. Cyber Monday alone is expected to account for $993 million of this total.

The appeal of BNPL lies in its accessibility. Unlike traditional credit cards, many BNPL providers, such as Klarna, Afterpay, and Affirm, conduct only soft credit checks and don't report payment histories to credit bureaus. This makes the service particularly attractive to younger shoppers or those with limited credit histories.

Regulatory Protections for Consumers

This year, consumers using BNPL services can feel more secure, thanks to enhanced regulatory oversight. In May, the Consumer Financial Protection Bureau (CFPB) announced that BNPL providers must comply with rules similar to those governing traditional credit, such as offering mechanisms to dispute transactions and seek refunds.

Signing up for a BNPL plan is straightforward. Consumers provide bank account details or a debit/credit card and agree to monthly installments, often over eight weeks or more. The loans are marketed as having low or no interest, although late payments may trigger fees or penalties.

Potential Pitfalls

Despite its convenience, financial experts caution that BNPL can lead to overspending. "Buy Now, Pay Later can be an innovative tool for purchases you’re going to make anyway," said Mark Elliott, chief customer officer at LendingClub. "The challenge is that it does fuel overspending."

The psychology behind BNPL often makes shoppers feel they have more disposable income, encouraging them to buy more. In fact, retailers report that customers spend an average of 20% more when BNPL options are available.

Consumer advocates also warn about the risks of using credit cards to fund BNPL payments, as it can lead to double interest — on both the BNPL loan and the credit card balance.

Rising Debt Among Younger Consumers

Younger generations, particularly Gen Z and millennials, are entering this holiday season with already high levels of debt. Emily Childers, a consumer financial expert at Credit Karma, noted that credit card balances for these groups have risen by over 50% since March 2022, when the Federal Reserve began raising interest rates.

"Young people are entering this holiday season already in the red," Childers explained. "And they’re continuing to bury their heads in the sand and spend."

Merchants’ Perspective

For retailers, the benefits of BNPL are clear. The service not only drives larger cart sizes but also increases conversion rates, turning casual browsers into buyers. The increased spending, however, raises questions about the long-term financial health of consumers.

"The psychographics of 'Buy Now, Pay Later' may be different — people don’t think of it as debt — but it is," Elliott said.

Proceed with Caution

While BNPL offers a convenient way to manage holiday spending, it’s not without risks. Missed payments can result in fees, interest, or even loss of access to the service in the future. Experts advise consumers to carefully track their BNPL commitments, especially if using multiple providers, as there is no centralized reporting akin to credit card statements.

As the holiday season unfolds, the key to leveraging BNPL effectively lies in responsible spending and careful budgeting. For those who can navigate its pitfalls, it can be a valuable tool. For others, it could lead to a financial snowball effect that’s hard to control.