The 3 common myths in BNPL
As the buy now, pay later sector continues to grow and mature, there are a few ‘myths’ that have emerged around usage and irresponsible spending.
RFi Group’s Kate Wilson tackles the misconceptions.
1. BNPL is a millennial-only proposition
This is a common assumption about who is using BNPL, and while it is true that millennials and Gen Z consumers were the early adopters of BNPL, we have seen this change over time as the market has matured.
Looking back to July 2018, RFi Group research tells us that around 1 in 3 consumers aged under 35 were using BNPL, compared to 1 in 5 consumers aged 35-44.
However, BNPL usage for this segment has since caught up, with just over 40 per cent of consumers aged 35-44 using at least one BNPL service as of July 2020, in line with results for BNPL uptake among under 35s.
Over the last two years we have also seen BNPL uptake increase among the older Gen X and Baby Boomer segments although these customers remain significantly less likely than average to be BNPL users.
BNPL as a category has also matured significantly over the last few years.
There are now a range of different providers available to customers, each with a different proposition and target market.
While early adopters of BNPL were likely using services like Afterpay to make relatively low value purchases from online retailers like The Iconic, services like ZipMoney Humm and now Brighte are supporting customers to make higher value purchases including furniture, whitegoods and solar panels – not your typical millennial purchase.
The ability for customers to purchase interest free using BNPL in an increasing number of industry verticals and at a wider range of price points will naturally lead to an evolution in what a ‘typical’ BNPL customer looks like.
2. BNPL encourages over-spending
This one is a theme I see referenced regularly in media reporting around on the topic of BNPL and I believe is worth addressing for that reason.
We have also seen the perception of BNPL encouraging customers to spend beyond their means or to unknowingly take on debt come through in our data so it is clear that this type of reporting impacts on perceptions of these services among users and potential users.
Data on BNPL customers is often reported in the media without contextualising some of the key demographic differences that exist between BNPL and non-BNPL users, including age.
Despite increased uptake among older consumers, BNPL customers continue to skew younger than the overall market.
This is important as younger customers are more likely to have low levels of financial literacy and a less advanced understanding of key terminology and features of banking products as a result of their lack of experience with these products.
Many younger customers will also be unaware of the impact of missing credit card repayments on their credit score for example.
It is true that, at least historically, BNPL users did not see BNPL as a credit product but as a budgeting tool.
However, viewing BNPL this way does not necessarily mean that customers will misuse the product.
The misunderstanding of BNPL, and credit products more broadly, I believe points to a more important issue; there is a greater focus needed on developing financial literacy and financial wellness among younger Australians.
There is also, unfortunately, a segment of the population who struggle with debt and who are at risk of overspending (on BNPL as well as on traditional credit products) and this is the bigger picture that should be addressed.
3. BNPL is replacing traditional credit products
Whether this assumption is true or not is slightly more complex as it’s undeniable that BNPL has had an impact on credit card usage and has caused a migration to debit in certain spend categories, but it’s not as black and white as is often made out and there are a lot of factors to consider.
Firstly, while Reserve Bank data points to consumer spending shifting away from credit and towards debit the decline in credit card usage pre-dates BNPL services entering the market. BNPL has undoubtedly capitalised on this, but it is not the sole cause.
BNPL is not necessarily a credit card alternative either.
In fact, our data shows that cardholders are just as likely to use BNPL as a non-cardholder.
However, the younger age skew to BNPL users means that BNPL users are less likely than average to hold a credit card as credit card ownership does pick up as customers age.
The fact that younger consumes are increasingly using BNPL as their first ever credit product does of course raise the question of how this will impact their expectations of credit cards later down the track and also whether they will put off taking out their first credit card as BNPL is filling the credit gap initially.
Importantly, BNPL usage does not necessarily prohibit future uptake of traditional credit products.
It may even serve as a stepping-stone that helps customers to become more comfortable with managing credit repayments.
We can see this when we look at future credit card uptake intention, which is higher for BNPL users than non-BNPL users across every age group.
My prediction: we will see first credit card uptake shift to later in life and credit cards will have to adapt to offer more BNPL-like features (and not just 0 per cent interest).
Kate Wilson is the deputy general manager of RFi Group. The full report is included in the October edition of AB+F.