The Growth of the ‘Buy Now, Pay Later’ Model

With the rise of new payment methods focused on buy-now-pay-later (BNPL), namely targeting the instant gratification generation of millennials I look into the trends of the more established payment methods, such as lay-by and credit cards.

In Australia Post’s recently released report on our online shopping eCommerce habits (FY19), BNPL was identified as an accelerated growing trend now making up 6.7% of online payments. Credit card’s still make up a quarter of online payments, but we are definitely seeing a generational shift away from the credit card.

In Roy Morgan’s most recent release (June 2019), Gen Z is definitely less likely to pay by credit card compared to Gen Y (see below chart). Gen Z is less than half  as likely to have purchased using credit card, opting for debit card as a preference, whereas Gen Y is 31 times more likely than average.

Additionally, Gen Y is 63 times more likely than average to have purchased by lay-by in the last 3 months, whereas Gen Z is only on average.

BNPL is an appealing option, as unlike a credit card there is no service fee for customers who pay on time, plus unlike lay-by there is no waiting for the product. Australia Post report states, “Millennials, those born after 1981 and who are 18+, are the fastest adopters of BNPL. These shoppers are more likely to be female (78.7%) and of a younger demographic. They are also frequent online shoppers, with 86% purchasing at least monthly. Last year, Fashion purchases accounted for almost half (48.3%) of all BNPL purchases. Afterpay is the most popular BNPL provider, recording $2.3 billion in underlying sales through its platform in the second half of 2018.”

According to the RBA 2019 Credit and Charge Card report the number of credit cards issued dropped more than 1.5M, while Buy now pay later (BNPL) options gained share in FY19.

Credit cards are an important revenue stream for banks, and with an average interest rate charge of c. 17%, you can understand why. However, challenger brands such as ME recently reported a step away from their credit card offer. As reported in the Financial Review, ME chief executive Jamie McPhee said the arrival of buy now, pay later schemes such as AfterPay Touch have fundamentally disrupted the market and forced the bank to scrap a planned investment in credit credits leading to a $14.4 million write down. “I don’t think my daughters will ever own a credit card. They will have a debit card and a buy now, pay later account,” Mr McPhee said.

With 2024 being the tipping point for our population, where the younger generations will outnumber the older generations, it is becoming increasingly important to tailor a retail offer to the millennial buyer. And what this buyer wants is instant access to a product, but are weary of taking on broad financial risk in a credit card, where as BNPL is broken down payments for a single item. I think we will begin to see a ‘hang-over’ from the adoption of BNPL models, management of multiple purchases for example but I still think there is room to grow. And with the run-up to Christmas, lay-by models still have a place for the well planned parents locking in and not having to hide those big ticket items, especially in the discount department store.

So the question then becomes away from the technology, and more about what is the key benefit that the generation is pursuing. In the case of payment, it would appear that where lay-by falls short is in its immediacy, which is especially understandable in the case of fashion trends. Customers will search for an alternative provider if they can deliver sooner, ie. tomorrow. And if they can pay later, and not even pay a premium for the privilege, even better. In economies where the cost of finance is approaching negative interest, the predilection to pay high premiums for credit seems less and less palatable to consumers.