Gen Z debt crisis worsens as buy now, pay later services soar

The “buy now, pay later” (BNPL) trend is poised to dominate the holiday shopping season, with spending predicted to rise by 11.4% compared to last year.

According to Adobe Analytics, consumers will use BNPL services to purchase $18.5 billion worth of goods between November 1 and December 31, including $993 million on Cyber Monday alone.

Source: Adobe Analytics

As inflation persists and credit card debt hits record highs in the US, the appeal of spreading out payments has made BNPL services a popular choice, particularly among younger shoppers with limited credit history.

What drives the BNPL boom?

The rapid rise of BNPL plans has been fuelled by a combination of economic pressures and changing consumer preferences.

Younger consumers, including Gen Z and millennials, are particularly drawn to these services as they often bypass traditional credit checks and avoid impacting credit scores.

Providers such as Klarna, Afterpay, and Affirm offer short-term loans with minimal or no interest, making them attractive alternatives to credit cards.

Financial experts caution that these plans come with risks.

Shoppers who link BNPL payments to credit cards may incur compounded interest and late fees, creating financial pitfalls.

With credit card balances for younger generations up over 50% since the Federal Reserve began hiking interest rates in March 2022, financial advisors stress the importance of prudent spending.

Merchants see sales boost, with BNPL increasing cart sizes by 20%

Retailers have embraced BNPL services as they encourage larger cart sizes and higher conversion rates.

Research from the Federal Reserve Bank of New York indicates that shoppers spend an average of 20% more when BNPL options are available.

This has made BNPL a strategic tool for merchants aiming to maximise holiday revenue during an economically challenging period.

For consumers, however, the psychological appeal of BNPL can lead to overextension.

The perception of smaller, spread-out payments often makes buyers feel they have more disposable income, resulting in additional purchases.

Consumer watchdogs have flagged this behaviour as a risk, particularly when multiple BNPL services are used simultaneously without centralised reporting.

Regulatory safeguards

BNPL providers are now under closer regulatory scrutiny.

In May, the Consumer Financial Protection Bureau (CFPB) mandated that these companies adhere to regulations similar to those governing traditional credit.

This includes providing avenues for refunds and disputing transactions, offering consumers added protections.

Despite these measures, missing a BNPL payment can still have consequences.

Penalties may include late fees, interest, or being barred from using the service in the future.

Financial experts encourage shoppers to carefully manage their payment schedules to avoid financial strain during the holidays.

Economic challenges

For many consumers, BNPL plans offer a solution to holiday shopping during a time of economic uncertainty.

Inflation continues to erode purchasing power, and revolving credit usage is at an all-time high.

Financial services firm LendingClub highlights that BNPL users often underestimate the true cost of their spending, leading to long-term debt accumulation.

Retailers, on the other hand, benefit from the psychology of deferred payments, which encourages higher spending.

As holiday shoppers grapple with balancing immediate gratification and long-term financial health, the growing popularity of BNPL raises questions about its sustainability as a financial tool.

Key risks and rewards

While BNPL offers convenience and flexibility, it also poses risks for unprepared consumers.

Experts advise against using credit cards to fund BNPL payments, as this can lead to compounded interest charges.

Additionally, those who lose track of multiple BNPL agreements may face unexpected financial burdens.

For retailers, the holiday season presents an opportunity to capitalise on this trend, but consumer advocates stress the importance of financial literacy to ensure shoppers can use BNPL responsibly.

As the landscape evolves, understanding the mechanics and potential pitfalls of these services will be crucial for both consumers and merchants.

With BNPL usage forecasted to reach $18.5 billion this holiday season, the payment method continues to redefine how consumers approach shopping.

As younger generations embrace flexible spending options, the need for financial education and responsible usage grows.

Meanwhile, retailers leverage the trend to boost sales, highlighting the dual impact of BNPL on the economy and consumer behaviour.

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