By: Jennifer Bennett, Strategic Product Manager, Velera

The popularity of Buy Now, Pay Later (BNPL) installment payment plans continues to skyrocket. Many consumers view BNPL solutions as a way to have more flexibility and control over their finances with the uncertain economy. 

Installment plan offerings come in two different varieties — at-purchase and post-purchase plans. The most common offering — at-purchase, point-of-sale (POS) plans — requires consumers to pay by enrolling in installments during the checkout process of a purchase. Post-purchase plans require processor integration, but allow consumers to convert a recent credit card purchase into installments. Post-purchase plans are recommended because they provide card issuers greater flexibility based on cardholder history, existing credit lines and regular interactions. 

The installment payment plan offerings that most consumers are familiar with are point-of-sale plans from the big BNPL merchants like Affirm, Klarna, Sezzle and AfterPay. Point-of-sale BNPL is even moving into the physical merchant space, with retailers like Walmart offering Affirm’s BNPL option at their self-checkout kiosks. 

Increasing Popularity

Consumers’ usage of BNPL programs hit an all-time high for the 2023 holiday shopping season, up 14% year over year, according to Adobe Analytics. Consumers made $940 million in purchases using BNPL apps on Cyber Monday alone, an increase of 42.5% year over year. The Velera Payments Index found that growth in BNPL payments for the top BNPL merchants like Affirm, Klarna and Sezzle increased 24% for last year’s holiday season (October to December) compared to 2022. Klarna and Afterpay had the highest growth in BNPL payments for the cumulative holiday season, up 27% and 26%, respectively. When looking back at 2023 as a whole, Adobe Analytics reported BNPL drove $75 billion in online spending, up 14.3% year over year, and $9.4 billion more than 2022.

BNPL’s popularity is likely to increase, especially with the 2024 holiday shopping season around the corner. Credit unions must keep up with the interest and demand of consumers for BNPL offerings or they will risk losing to competitors. 

New Rule Introduced by the CFPB

Despite the increasing use of BNPL installment payment plans by consumers, many credit unions have been waiting for guidance from regulators before they adopt. That guidance has arrived, as the Consumer Financial Protection Bureau (CFPB) recently issued an interpretive rule stating that lenders who offer BNPL meet the criteria for being credit card issuers under the Truth in Lending Act (TIL) and must follow the same regulations. As reported in this Financial Brand article, industry analysts believe this regulatory clarity further legitimizes BNPL offerings and will stimulate even more BNPL activity in the long run. 

This news is positive for consumers who participate in point-of-sale BNPL installment payment plans, because they will finally be offered the same protections as those who participate in post-purchase BNPL solutions. However, it will take time for point-of-sale BNPL merchants like Klarna, AfterPay and Sezzle to adjust the mechanics of their installment payment plans. Whereas, post-purchase BNPL solutions are not affected by the new interpretive ruling, as those consumer protections were already in place by the nature of the post-purchase application of those installment plan offerings. 

If credit unions choose to offer post-purchase BNPL offerings, they already have several advantages over fintech BNPL merchants because members’ cards are already on an approved line of credit and comply with regulations through the underwriting process. In addition, if a member participates in a post-purchase BNPL installment payment plan, their credit union has insight into their debt-to-income ratio, making additional lending decisions easier. 

Key Takeaways

It is likely that many of your members are already using a BNPL offering. This is especially true among younger generations: More than half of Gen Z (59%) respondents in Velera’s 2023 Eye on Payments study reported using BNPL programs, and Younger Millennials show the greatest likelihood of using their financial institution’s BNPL program (61%), an increase of 74% from 2021 (35%). 

However, as the Office of the Comptroller of the Currency (OCC) noted in guidance to financial institutions regarding the risk of BNPL offerings, borrowers can easily overextend themselves. BNPL offerings are often positioned as new ways of buying — not borrowing — and many consumers don’t consider it “debt.” 

Backed by the “people helping people” philosophy, credit unions should continue providing educational resources about BNPL’s risks and benefits to help prevent members – whether young or old – from overextending themselves and getting into debt they cannot repay, especially as delinquencies are on the rise. A 2023 study from the CFPB found consumers who use a BNPL offering are twice as likely to be delinquent on another credit product. Credit unions can manage risk by implementing compliance best practices, such as having a dedicated risk management team that monitors transactions. Providing cardholder education is also key to help manage risk. 

Credit unions should make it clear to members that BNPL should be used as a budgeting tool to provide greater flexibility and choice when it comes to payments, not as an opportunity to live beyond their means. If you have members who are in debt due to BNPL loans, offer financial counseling or credit card balance transfers to help members figure out how to best pay off their obligations. 

BNPL installment plans are here to stay and can provide many benefits for credit union members — when used responsibly. Consider partnering with a fintech credit union service organization, like Velera, to offer a post-purchase BNPL solution for your members. Not only will this keep your credit union competitive with fintech BNPL merchants, it will even give your credit union a leg up on the competition, as post-purchase BNPL solutions already comply with the CFPB’s new rule. Couple your post-purchase BNPL offering with educational materials to make sure your members are armed with the knowledge about utilizing BNPL plans responsibly. 

The 2024 holiday shopping season is fast approaching — are you ready to keep your credit union competitive by offering a post-purchase BNPL solution? 

Jennifer Bennett is a seasoned strategic product manager with over 20 years of experience in the payments industry. Renowned for her expertise, Jennifer has consistently demonstrated leadership and innovation, particularly in her work in the credit union space. Her strategic vision and deep understanding of the financial sector have been pivotal in driving product development and enhancing customer experiences.