How COVID-19 is Affecting Buy Now, Pay Later

The gradual decline in demand for credit cards, combined with the rapid switch to online shopping and tightening consumer budgets in the wake of COVID-19 could prove to be a winning combo for Buy Now Pay Later (BNPL) platforms such as Afterpay. Given 1 in 4 shoppers say they will shop more frequently online once the outbreak is over, could we start to see a broader shift towards BNPL platforms and away from Credit Cards?

For the past few years, the demand for credit cards has been in decline. 

This is evident when looking at both the number of cards in circulation as well as the amount of credit owing on these cards. BNPL platforms have been trying to capitalise on this shift and, at least where younger consumers are concerned, have been pretty successful. BNPL platforms do still only account for a relatively small percentage of payments overall, but their share is growing. Of these platforms, Afterpay is the leader in Australia by far.

Cut to the last two months, and on the surface it looks like these shifts have been accelerating. 

Google Trends has shown a massive spike in searches for Afterpay, and a massive decline in interest in Credit Cards. Whilst it could be easy to write off the interest in Afterpay to the recent purchase by Tencent Holdings of a 5% stake in the company for $300 million, AlphaBeta too has shown a huge increase in transactions processed through BNPL platforms. 

It is worth nothing though, that Afterpay itself reported a decline in the first half of April. 

This is all occurring despite Afterpay revealing a tightening of their lending criteria in an April announcement to the ASX. They were worried that the health-turned-economic crises could leave them with an increased number of defaulting customers and made the move to decrease their risk. 

To date, I haven’t seen much reaction from Credit Card companies beyond offering assistance in reduced rates/fees. However, it isn’t unreasonable to wonder if there will be a crackdown based on the double digit unemployment figures projected. This has actually already happened in the UK where 32,000 credit cards were suspended by Virgin Money without warning due to negative outcomes from ‘affordability checks’. Such a move in Australia could potentially open the door for other credit alternatives.

Are BNPL Transactions Increasing?

Based on all of this information, we decided to check out a sample of our clients to see if the volume of BNPL transactions have significantly increased over the month and a half, and if they have eaten into the market share of Credit Card transactions. 

After analysing more than 70,000 transactions across a number of clients, we found that the volume of BNPL transactions has significantly increased, but the % of total transactions completed through BNPL has actually fallen. So, while more sales are being processed using Afterpay, total sales are growing faster and Afterpay is not actually growing its total share of transactions.

If we start digging a bit deeper, the greatest % increases in transactions using BNPL are in the older demographics, who contributed relatively few transactions previously (and still do in comparison to their core market of Millenials). Interestingly, it looks as though BNPL transactions by younger age brackets have actually decreased relative to total transactions. 

This has lead us to a few theories:

1. The forced shift from offline to online has caused a huge number of people who have never shopped online or were not habitual online shoppers to change their habits. This may explain the relatively large increase in BNPL transactions from older demographics. 
2. BNPL is largely used by Millennials – in fact they’re twice as likely as the average population to already be using this service. This already large user base may mean there is comparatively less room for a massive (additional) spike in growth. 
3. In addition, these age groups are reportedly amongst the hardest hit by job losses in retail and hospitality.

From the outset, I hypothesised that there would be a significant jump in BNPL transactions, as cash and confidence tightened across the board. But, I wasn’t expecting such a nuanced story. My key takeaways?

1. If you’ve already got BNPL options on your website (and you should), it looks like any sales growth will be incremental for the current core demographic. The real opportunity could well be outside of this core demographic.
2. If this is in fact a ‘new normal’, it might be worth looking at your website with fresh eyes, and putting yourself in the place of a less experienced or older customer. If all of your user testing was previously focused on younger users, you may be missing out on what looks like a rapidly growing market segment.