How Buy Now, Pay Later became this generation’s layaway

Part one in a series on one of today’s hottest payment methods: Buy Now, Pay Later

During the height of the Great Depression, retailers and their customers were struggling to survive. Yet many Americans, cash-strapped though they were, still had a strong desire to buy goods. And many retailers, desperate for cash flow, needed Americans to spend money on non-essential items, even if they couldn’t afford those items at the point of sale.

In that period of distinct economic uncertainty, “layaway” financing was born. Long before credit and debit cards existed, the layaway program was an innovative solution that allowed consumers to secure items for purchase, pay a little at a time, and then eventually take ownership of that item once it was fully paid for. 

Fast forward to 2020. Economic uncertainty once again dominates the zeitgeist. Layaway financing, in the form of Buy Now, Pay Later (BNPL) payment options, is making a surprising comeback. According to a survey of 2,006 consumers completed by Propellor Insights for Marqeta, 37% of Americans said they have used a Buy Now, Pay Later service as of October 2020.

What is Buy Now, Pay Later?

Buy Now, Pay Later is a financing option now available to retailers and consumers that serves as an alternative to credit cards. Fueled by companies like Affirm, Sezzle, Klarna, and Afterpay, BNPL financing allows consumers to instantly obtain interest-free or low-interest loans at the point of sale. Consumers can use this payment method at online retailers and brick-and-mortar stores to make instant purchases with no money down. They can then pay off the loans over a predetermined number of months with an installment-based payment plan.  

For consumers, BNPL presents an opportunity to purchase higher-cost items without cash on hand. For retailers, it means increased cash flow and the potential to lure back consumers who have become leery of incurring credit card debt. In October, Macy’s announced it had invested in Klarna. The iconic New York department store will be one of the first of its kind to offer Klarna’s service.

Why are consumers choosing Buy Now, Pay Later payment options?

When they launched around eight years ago, today’s most popular BNPL solutions attracted an early user base of debt-laden millennials and Gen Z consumers. Burdened with an average debt of $29,900 — most of it from credit card purchases — millennials sought credit alternatives. 

Companies like Affirm, Klarna, and Afterpay saw an opportunity to leverage new technologies — the cloud, mobile, machine learning — to provide more affordable access to credit and a dramatically improved user experience. Their products resonated deeply with early and late adopters.

Why consumers choose Buy Now, Pay Later

If early Buy Now, Pay Later adopters were driven by the desire to avoid credit card debt, the current wave of new users said they are attracted above all by the convenience and flexibility of BNPL financing. According to the Marqeta survey, over 74% of respondents said they used BNPL financing for the first time since the pandemic began. Of those respondents, 56% said they signed up because BNPL was a convenient way to pay, 48% cited greater flexibility on payments, 40.5% cited interest-free offers, and 18% said they had no other access to credit.

Another factor behind the popularity of BNPL is the shift to online shopping that was accelerated by the pandemic. Sixty-seven percent of BNPL users said they shopped online at least once a week, compared to 41% of non-BNPL users. Indeed, consumers who did not use BNPL were much more likely than BNPL users to describe their online shopping as “sporadically, as needed.” 

As the holidays approach, the ranks of BNPL shoppers seem destined to grow. More than one out of three (36%) survey respondents who had not used BNPL said they were open to using a Buy Now, Pay Later payment method in the future. And, of that group of would-be users, more than half (61%) responded “yes” to the question: “If you could use Buy Now, Pay Later services for all of your holiday shopping, would you?”

Read more in our Buy Now, Pay Later series:

10 surprising characteristics of Buy Now, Pay Later users

Buy Now, Pay Later vs. installment loans

Bank of America’s move into no-interest installment loans

Why financial institutions want their share of Buy Now, Pay Later transactions