Buy Now, Pay Later popularity soared in 2023

The popularity of "Buy Now, Pay Later" services has boomed, with spending through companies like Affirm (AFRM) and PayPal (PYPL) reaching $64.9 billion through November per Adobe Analytics data. These alternative payment platforms allow consumers to buy items upfront and pay in installments over time.

Yahoo Finance Retail Reporter Brooke DiPalma analyzes the rise of BNPL providers and their flexible payment options, exploring the benefits and risks posed for both consumers and retailers as adoption gains steam.

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Video Transcript

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- As consumers look to fill up their carts, gas tanks, and closets this year, a rising number of Americans leaned on alternative payments, like buy now, pay later.

According to Adobe Analytics, for the first 11 months of the year, from January 1st to December 6th, consumers spent a total of $64.9 billion using buy now, pay later platforms. That's up 15% from a year ago. And this is leading to the perfect storm for both fintech companies and retailers.

Brooke DiPalma is here with the details. Hey, Brooke.

BROOKE DIPALMA: Good morning, Brad. Good morning, Seana. I mean, certainly, we've seen so many consumers be resilient this year. Very cautiously optimistic consumer spending, even though their wallets have remained pinched all year. But these alternate payment options, like buy now pay later, really rising to the occasion. Really allowing consumers to break down and split up their payments into equal installments.

And even Affirm CEO coming on to Yahoo Finance, touting that consumers see this as a safer option with closed and fixed loans, and avoid the traps of revolving credit without any late fees.

So what exactly does this mean for the economy? Well, economists telling me that it's allowed consumers to have an easier time spending than historically. And this has allowed for more spending, increased sales, and greater financial inclusion.

And it's also been a win for retailers because if these consumers didn't have this option and they didn't want to rely on credit, well, then they ultimately wouldn't have made as many sales as they have so far this year. Retailers this-- one expert telling me that this was a good deal for retailers so far this year.

But it's important to know that we have limited data on these buy now, pay later companies. We know that according to the Consumer Financial Protection Bureau report back in March that consumers using these services tend to have a household income between 20,000 to 50,000, which, one expert telling me that's a very more vulnerable population.

So it's important to keep an eye on this, come 2024. If households rely on these buy now, pay later options, well, then all these small payments could ultimately lead to a larger balance that could lead to vulnerability. So one expert telling me that it's important for consumers to really take a look at themselves and ask, if I have an unexpected payment, can I still afford to pay this off?

- And Brooke, we know what this means from a consumer standpoint. But what about from an investor standpoint? Because I think a lot of people are out there trying to figure out exactly what this means. If they are able to profit off this type of trend, what stocks would you say are best positioned in the category?

BROOKE DIPALMA: Yeah, well many analysts telling me that Affirm is a clear winner in the pack here. Affirm, PayPal, Square, which owns Afterpay, they're all down from their IPO price, but Affirm really seeing an uptick. Year-to-date shares are up more than 340%. And in the last month alone, shares of Affirm are up 70%.

But, really, the way that it works is Affirm earns revenue partially from merchants when they help facilitate a transaction. They dub it merchant discount rate. So essentially, if a consumer buys $100 pairs of shoes, then Affirm pays the retailer $95, and Affirm makes $5.

And one expert telling me-- said that they're the leader of the pack, with the greatest ability to underwrite for these purchases. And Affirm is continuously assessing customers' financial health after each purpose. He also said that come years from now, buy now, pay later will just be one way that Affirm makes money.

And so the idea that they're able to skirt around the risk that consumers won't be able to pay back is a key component of Affirm's business model. But there are currently five-- there are currently ratings of 5 buys, 11 holds, and 6 sells of Affirm on the street right now.

Some of the risks outline is that we saw that boom of e-commerce during the pandemic. Can they keep up with that as they look to make their way in physical retailers as well? And also, the competition just keeps rising as PayPal and Afterpay really look to get a slice of this pie.

- Crazy year-to-date performance that we've seen for Affirm. And, of course, it comes off of some of the company lows, but at the same time, still remarkable environment that they're navigating through right now.

BROOKE DIPALMA: Still down from their IPO though. So people look out. Yeah.

- Our own Brooke DiPalma breaking down all things BNPL here this holiday season. Thanks so much, Brooke.