Written by Ariana McLemore
NEW YORK (Reuters) – U.S. shoppers are expected to spend a record $18.5 billion using third-party buy-now, pay-later services on holiday purchases in the fourth quarter, according to a forecast released by data firm Adobe Analytics on Wednesday.
With many Americans in debt recently, spending on buy now, pay later services is expected to increase 11.4% compared to last year’s holiday season, Adobe said.
Buy now, pay later services allow shoppers to expand their purchasing power by paying for goods in monthly installments spread over up to 36 months; however, the most common payments are four-instalment payment plans.
The projected increase in buy-now-pay-later spending exceeds the 8.4% increase in overall spending during the upcoming holiday shopping season, which could reach about $240.8 billion, according to Adobe Analytics. Its forecast applies to the period between Nov. 1 and Dec. 31.
That means companies like Klarna, Afterpay and Affirm are poised to take market share from debit cards and other forms of payment for electronics and beauty products during the holiday season, a time when many shoppers rack up debt on gifts. However, some shoppers are using credit cards to cover payments due through buy-now-pay-later services, which consumer watchdogs say could add to their debt.
Shoppers who use credit cards to make BNPL purchases risk putting themselves in a cycle of debt that is difficult to escape, said Delicia Hand, senior director of digital marketplace at Consumer Reports.
“If the credit card balance is not paid in full each month, they will incur interest fees on buy now, pay later transactions in addition to any potential BNPL fees,” Hand said.
The net chargeoff rate that U.S. banks charge on credit cards, or the amount banks don’t expect to collect on loans, rose to 4.82% in the second quarter, according to data from the Federal Deposit Insurance Corp. That was the highest level since 2011.
The New York Fed’s monthly consumer expectations survey, which among other things asks consumers to estimate the likelihood of defaulting on loans in the next three months, was 13.6% in August, the highest level since a brief spike at the start of the Covid-19 pandemic. The figure was 19.5% for those making less than $50,000 a year.
According to the FinTech Association, which counts Zip and Klarna as members, around 10% of BNPL purchases are made using credit cards and automated clearing transactions. The FTA said its members report delay rates of less than 2% for BNPL purchases.
Affirm expects shoppers to look for electronics including cell phones, laptops and headphones this holiday season as they look to replace personal items they bought during the height of the pandemic. Beauty will also be a key category for BNPL shoppers buying gifts, the company said.
Affirm allows users to make purchases and make initial payments using credit cards, but it doesn’t accept credit payments on most of its loans, according to its website. Affirm also supports Shopify’s (NYSE:) Shop Pay service, which allows credit card transactions on its pay-in-four product.
According to a company spokesperson, credit card payments make up a “single-digit percentage” of the total payments Affirm collects.
“In general, we don’t think that paying credit for credit is a good thing,” said Michael Linford, Affirm’s chief operating officer and chief financial officer.
Afterpay accepts payments with credit and debit cards from Mastercard (NYSE:) and Visa (NYSE:), according to the company’s website. It does not allow shoppers to use cards issued by other BNPL providers to make purchases.
Klarna accepts debit and credit cards from Visa, Discover, Maestro and Mastercard; however, shoppers cannot pay for purchases made with a Klarna card using credit cards.
In May, the U.S. Consumer Financial Protection Bureau issued an interpretive rule that imposes new requirements on credit unions. The rule requires credit unions to investigate disputes between consumers, recover funds that have been returned, and provide periodic account statements. The unions are not required to assess a consumer’s ability to repay the loan.
American Express The New York Stock Exchange (NYSE:) is allowing its users to pay BNPL installments with a limited number of BNPL providers, according to a company spokesperson.
It also allows credit card members to use the BNPL Plan It service, which is linked to physical American Express credit cards.