Dive Brief:

• “Financially fragile” buy now, pay later users are turning to the installment payment method more frequently than financially stable consumers, according to new research from the Federal Reserve Bank of New York.
• BNPL users who are financially fragile “appear to have embraced BNPL as a regular payment option,” the New York Fed said in its second report on BNPL, released Wednesday. About 60% of that group have used BNPL five or more times in the past year, compared to just over 20% of financially stable consumers.
• Financially fragile users are also tapping BNPL for smaller purchases, the NY Fed said. The majority of financially fragile users are turning to BNPL to make purchases under $250, while financially stable users are far more likely to use it for purchases between $1,750 and $2,000.

Dive Insight:

The NY Fed previously deemed consumers using BNPL as more likely to be “financially fragile,” noting in a September report that they have credit scores below 620, have been delinquent on a loan or have been rejected for a credit application over the past year. 

The study released Tuesday, “How and Why Do Consumers Use ‘Buy Now, Pay Later’?” offers more evidence that BNPL is especially appealing to those who struggle to obtain credit, researchers wrote in the blog post. BNPL loan terms can vary, but the concept generally refers to interest-free loans paid in four or fewer installments.

With its report, the NY Fed aimed to “shed further light on BNPL’s place in its users’ household finances, with a particular focus on how use varies by a household’s level of financial fragility,” according to the blog post. Researchers drew on questions added to last October’s Survey of Consumer Expectations Credit Access Survey. Of the survey’s sample of 1,000 households, about 200 reported BNPL use. The financially stable label was applied to any respondents not considered financially fragile.

Among all users, one-off BNPL use is rare, the NY Fed said. About 72% of financially stable BNPL users and 89% of financially fragile users have made multiple purchases using BNPL over the past twelve months, researchers said.

Compared to nearly 30% of financially fragile users, just 14% of financially stable users have turned to BNPL 10 or more times in the past year. Use by the latter group drops off “substantially” after a few times, although a small group turns to it frequently, the NY Fed noted. 

When respondents were asked why they use BNPL, both groups emphasized the appeal of spreading out payments over weeks, according to a word cloud representation of responses. 

However, financially fragile users tend to talk about ease of access or a lack of money upfront to make purchases, while financially stable users mention the appeal of no interest and the ability to spread out payments without using a credit card. 

Notably, the results were gathered before the holiday shopping season, when BNPL use in online shopping jumped. Researchers flagged the frequency of use among the financially fragile as something to watch going forward. 

“Given that BNPL use in the U.S. has not been observed over a full business cycle, this factor will be particularly important to track, as households may turn to BNPL if their financial conditions worsen,” the NY Fed pointed out.

The NY Fed also noted the results “reveal some misunderstanding of the product” among users — even those who are financially stable — who seem to believe BNPL will enable them to build credit. BNPL loans are still not widely reported to credit bureaus. 

The Financial Technology Association, a trade group that counts PayPal and Afterpay owner Block among its members, suggested the NY Fed’s findings point to BNPL’s popularity with consumers. The study “shows that consumers want a competitive financial system and are choosing payment options without high-interest rates or revolving debt,” FTA CEO and President Penny Lee said in a statement.

A spokesperson for San Francisco-based BNPL provider Affirm, which provides more long-term, interest-bearing loans than its BNPL peers, said the company’s interests “are aligned with consumers as we have zero business benefit to extending credit that can’t be repaid as there are no late fees or hidden charges.” Affirm provides transparent disclosures and engages with credit bureaus, the spokesperson said.