The Federal Reserve Bank of Kansas City recently issued a research briefing titled “The Appeal and Proliferation of Buy Now, Pay Later: Consumer and Merchant Perspectives.”
The briefing divides buy now, pay later (BNPL) products into two main types based on how they are offered to consumers. One type is offered directly to consumers by fintechs before a purchase is made and the other is offered during a purchase through a merchant who partners with a fintech or financial institution. According to the briefing, the first type of BNPL products generally target millennials, Gen Z consumers, and financially underserved consumers such as those with no or bad credit. The second type of BNPL products targets broader consumer segments, offers longer-term installments, and tend to have higher credit limits.
The briefing compares BNPL to other installment options, such as layaway and credit cards. It finds that BNPL products allow consumers with no or bad credit who do not qualify for credit cards to access goods and services. It describes interest-free BNPL products and layaway as comparable in their terms and costs but observes that BNPL allows consumers to take immediate possession of a product at the point of sale while layaway requires the consumer to wait until the product has been paid for in full. In addition, if the use of layaway requires a service fee, BNPL can be the least expensive method of payment. It also notes that interest-bearing BNPL products may be less expensive than credit cards because the average interest charge for BNPL is typically lower.
The briefing also discusses the risks to consumers (such as encouraging spending) as well as the benefits and risks to merchants who adopt BNPL products.