Increasing competition in the realm of point-of-sale (POS) installment plans will push existing buy now, pay later (BNPL) firms to diversify their offerings and target consumers beyond the existing core of Gen Z and millennial users.

How big is the BNPL space?

The number of US users of BNPL services has nearly quadrupled over the past two years, rising from 11.6 million in 2019 to 45.1 million in 2021. But this breakneck increase will slow substantially, from 81.2% year-over-year (YoY) growth in 2021 to just 5.6% by 2025 amid expected regulation and the challenges of gaining traction among consumers accustomed to traditional credit methods.

Although BNPL currently accounts for less than 2% of North American retail sales, its rapid growth has made it one of the most-hyped trends in payments. A crop of specialized providers—including Affirm, Afterpay, Klarna, Sezzle, and Zip (formerly Quadpay)—lead the way with easy access to short-term, POS installment loans (typically repaid in four installments over six weeks) and are being closely followed by credit card companies.

What’s driving the growth of BNPL?

BNPL providers promote their services as a win-win. Consumers are offered the flexibility to pay for their goods in installments, while retailers watch shopping cart sizes increase as well as gain access to valuable data.

BNPL’s popularity took off during the pandemic, starting with Gen Z and millennial consumers. These users are generally more digitally savvy and debt-averse and have lighter credit histories—all factors that added to the appeal of BNPL since most providers do not run hard credit checks. The sharp surge in ecommerce seen in 2020, coupled with the economic uncertainty that hit consumers facing layoffs, furloughs, and pay cuts, created ideal conditions for alternative forms of credit to make inroads.