If Cyber Five trends hint at what to expect from the rest of the holiday season, expect buy now, pay later (BNPL) to be a big hit. According to Adobe Analytics, orders placed with BNPL grew 85% over the course of the five days, echoing the growth BNPL providers saw in the third quarter. Though adoption is still relatively low, there’s a massive opportunity for providers who can prove their worth to consumers.

Holiday boost: As inflation continues to weigh on consumers, they are looking to BNPL to help with holiday shopping.

• In an October survey, 20% of US respondents planned to use BNPL this holiday season, according to the Electronic Transactions Association and The Strawhecker Group. Those who had previously used BNPL are 38% more likely to say they would use it again.
• BNPL emerged as a major trend during the Cyber Five. Orders placed with BNPL services grew 85% and BNPL revenues increased 88% compared with the week prior, according to Adobe.
• Companies from Amazon to Expedia are leaning into BNPL to encourage consumers to spend during the holidays. Amazon partnered with Affirm to offer 0% APR on holiday purchases during the Cyber Five period, while Expedia is offering BNPL for the first time via Afterpay.

The major players: Increased consumer use spells success for BNPL providers.

• Between January and September, Klarna’s US gross merchandise volume hit $8.6 billion, growing 92% year over year.
• Affirm's gross merchandise volume grew 62% year over year in its fiscal Q1, ending September 30. Despite a slight slowdown, Affirm hopes to become profitable by the end of fiscal year 2023.
• PayPal processed almost $5 billion in BNPL volume in the third quarter, a 157% rise year over year. More than 25 million customers use its BNPL product, which is offered by over 280,000 merchants on their product pages.
• Block’s BNPL offering, Afterpay, grew 120% over the Cyber Five compared to pre-holiday levels. Block reported strong growth in nontraditional BNPL categories like food and beverage (up 251%), travel and experiences (57%), and auto (32%).

The adopters: Only 12% of US consumers use BNPL regularly, according to an October survey by Bizrate Insights.

• While almost half (44%) of consumers report they have not used BNPL and are not interested, there’s a small opening for providers as over 1 in 5 US consumers are somewhat or very interested in the service.
• However, this number may continue to shift in favor of BNPL use if economic pressures continue to weigh on consumer budgets.

Give ’em what they want: What features can BNPL services offer to entice more adoption? According to our 2022 “US Buy Now, Pay Later Feature Demand” report, the top five most in-demand features for US BNPL users fall into two categories: fee avoidance and rewards.

• Over half (57%) of customers wanted the ability to pay a loan off early without a fee. Nearly as many (52%) like to make payments without incurring service fees.
• 56% of users are interested in earning rewards that don’t expire. Earning rewards on every purchase (52%) and earning rewards for paying on time (52%) were other in-demand features.

All talk: At the Money20/20 event earlier this year, BNPL was one of the most prominent themes, with many conversations centering around differentiation and innovation.

• Our analyst Dan Van Dyke claimed that BNPL 2.0 is approaching, marked by new business models that are more customer-focused.
• He said that as BNPL adoption normalizes, volume growth will become more resilient, and cross-selling and affiliate revenues will drive profitability.
• To increase engagement while also mitigating regulatory concerns, BNPL providers should also offer customers financial wellness tools, said Van Dyke.

What lies ahead: Though adoption is relatively low, we expect that to quickly change. We forecast BNPL payment value will reach $75.60 billion in 2022, growing by double digits each year to reach $143.44 billion in 2026, when almost 40% of internet users will have used a BNPL solution.

As we transition into the next wave of BNPL, providers will need to innovate and differentiate themselves to capture a share of those consumer dollars.

Pro tip: A Gen Z strategy is a must-have for providers, as they are the generation most likely to use a BNPL service. For example, this year, 55.1% of Gen Z digital buyers will use a BNPL service, versus 48.6% of millennials, 31.2% of Gen Xers, and only 16.3% of baby boomers. When targeting Gen Z, there’s a huge opportunity to capture consumers who haven’t built up credit yet but still want to finance small purchases.

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