New Plinqit survey reveals top savings priorities for today’s consumers.
The question of how to pay for a purchase is one that has taken the financial world by storm in recent years. Spend, save or borrow? Now or later? In particular, Buy Now, Pay Later (BNPL) products have surged in popularity with consumers.
In fact, data from C+R Research shows that 60 percent of consumers have used a BNPL service at least once and Juniper Research predicts that the number of BNPL users will reach 900 million by 2027, driven by the increased demand for low-cost credit solutions during an uncertain economy.
While BNPL solves a problem for consumers who need to afford a large purchase and break payments up into smaller installments to fit their budget, it’s not always the best option and can actually pose financial challenges down the road.
It’s Time to Re-think BNPL
In many cases, BNPL incentivizes spending and debt stacking in an era where saving money is particularly challenging due to economic issues like inflation. For instance, C+R Research shows that the average BNPL user is paying for approximately four items with the service and survey data from U.S. News shows that clothing is the most popular purchase category for BNPL.
Clearly, BNPL can be a tempting payment option for many, as it allows consumers to qualify for affordable financing without passing a hard credit inquiry. Additionally, a growing number of merchants accept BNPL as a payment option and even some banks are allowing their customers to pay for certain transactions over time with their own BNPL offerings. It’s no wonder adoption continues to grow.
However, is BNPL truly in the best interests of consumers and the institutions they bank with?
Could There Be a Healthier Alternative to BNPL?
Now more than ever, consumers need tools to support healthier financial habits and build their savings so they don’t have to take on more and more debt to fund basic purchases. Community financial institutions are perfectly positioned to help consumers re-think their relationship with BNPL and take steps toward a healthier financial future.
Flipping BNPL on its head and instead encouraging people to Save Now, Buy Later doesn’t just benefit consumers; it also benefits financial institutions by helping banks and credit unions generate and maintain deposits, which allows them to continue best serving the financial needs of their local communities. The good news is there are some tactics financial institutions can use to educate and empower consumers to make better financial decisions that serve both their short-term and long-term needs.
BNPL vs. Credit Cards – What Are the Risks?
Conventional wisdom says that consumers should plan ahead and save for future purchases. While this holds true, it’s not always feasible to dip into savings, especially in the event of a large, unexpected expense. When expenses arise that may not fit neatly into their monthly budget, consumers need to be equipped to thoughtfully consider the financing options available to them, whether it’s through a credit card or BNPL.
BNPL has gained popularity as an alternative to credit cards, particularly among younger consumers. However, both methods come with their own pros and cons, and financial institutions should encourage consumers to weigh the benefits and risks of each before making purchases.
Popular BNPL providers like Afterpay, Affirm and Klarna have little to no interest and no hard credit check. Some options carry no fees, essentially making it free financing for the customer. But, if a customer misses a payment, it can affect their credit score and there can be substantial fees for late payments. Also, some BNPL providers do not currently report positive payment history to the major credit bureaus, which means consumers cannot build their credit score like they could by making on-time payments for a credit card.
On the other hand, credit cards can be used almost anywhere and are more versatile for things like groceries and gas. Credit cards also help build credit history and offer rewards and points that can be used on travel and cash back. However, carrying a balance over to the next month can incur a significant amount of interest, making it even harder to pay off the new balance.
For individuals that do not currently have the savings needed to cover a purchase and are considering alternative financing options like BNPL against traditional options like a credit card, it’s often worthwhile to leverage the resources at their bank or credit union. By doing so, they can make an informed decision that best serves their interests long term.
Empower Customers to Save Now, Buy Later
Many financial products are designed to assist people through the various stages of their lives – whether that’s a student loan to further their education or a mortgage to purchase their first home. But, how many financial products are designed to truly improve the well-being of consumers and help them build enough savings to achieve sustained financial success?
The answer is not many, and that needs to change. Fortunately, digital banking capabilities have grown more sophisticated, presenting new ways for financial institutions to engage with customers and empower them to adopt healthier saving habits. For example, automated savings tools and personalized educational resources can prompt customers to set aside the money they need to make future purchases – whether big or small, while also helping financial institutions generate low-cost deposits.
No matter what a consumer’s financial goals are – whether it’s early retirement, buying a home or a new car, taking on debt has implications for those goals. Likewise, a consumer’s saving habits, or lack thereof, have significant implications for those goals. When deciding between BNPL financing and other forms of credit, it is best for consumers to consider how the line of credit will impact their ability to save and reach their goals.
Do they need to build up their credit score in the long-term to buy a house? If so, a credit card might be the best option. Do they need to make a necessary purchase right now and pay it off over time without impacting their credit score? If so, BNPL may be a good choice.
Or, perhaps they want to grow their emergency savings and reduce their reliance on credit cards and financing options. If that’s the case, giving the consumer a way to set a savings goal and incentivizing them to stick to it until they reach it, SNBL, can be a powerful tool.
Now is the time to give customers a Save Now, Buy Later option. As inflation continues and interest rates climb, consumers must avoid overextending their budgets and steer clear of financing that may hurt their credit score and send them deeper into debt.
The financial institutions that help their customers accomplish this will not only foster stronger, more loyal customer relationships, they also stand to generate more deposits. Ultimately, having a financially fit customer base goes a long way toward cultivating a healthier and more profitable bottom line.