More Americans are using 'buy now, pay later' services to pay for groceries. Here's why that's a worrying sign.

By Zoe Han

BNPL has traditionally been used to spread out bigger bills over a period of weeks or months

The concept of "buy now, pay later" has exploded in popularity in recent years. Americans have been using this form of lending -- in which the cost of a purchase is typically divided into four payments over several weeks or months -- to buy everything from clothes to Peloton bikes.

But now there is a new trend: People are using the payment method for smaller items, like groceries.

Buy now, pay later -- referred to in the payments industry as BNPL -- is a new spin on the concept of layaway. It allows consumers to get the product up front, divide their payment into installments paid over a longer period with little or no interest -- as long as the make the payments on time. Common BNPL options include Afterpay, Klarna, Affirm (AFRM), PayPal (PYPL) and Zip .

In the first two months of 2023, the share of online grocery orders made using buy now, pay later grew by 40% compared with the same period a year ago, according to new data released by Adobe Analytics this week.

The overall rise in BNPL online orders, meanwhile, grew by 10% over the same period, and overall online BNPL revenue fell by 19%, meaning the average dollar amount for each order fell.

This trend may be partly due to the fact that Americans are simply spending more money on groceries online. Online grocery spending grew by nearly 27% year over year to $8.4 billion in February.

Other categories were also popular for people buying now and paying later: Home furnishing purchases grew by 38% in the first two months of 2023 over last year, and apparel purchases grew by 8%. However, electronic purchases made using BNPL fell by 14%, Adobe found.

Apparel was the largest category that consumers used BNPL for from 2019 to 2021, according to a separate survey released by the Consumer Financial Protection Bureau last September. Apparel orders made up more than 50% of all orders made using BNPL payment methods in 2021, the survey found.

Electronics, sporting equipment and jewelry accounted for to 11% of all BNPL orders, while everyday BNPL orders, including groceries, accounted for barely 1% of all purchases in 2021.

Why are people using BNPL for groceries now?

High prices are driving consumers toward BNPL services, the Adobe researchers said. The rise in grocery orders using the service is also a sign that consumers are buying groceries in bulk online and utilizing special promotions -- in other words, "managing living expenses in more flexible ways," said Vivek Pandya, lead analyst at Adobe Digital Insights. The pandemic also drove some grocery shopping online, he added.

The inflation rate was 6% higher in February than a year ago, but grocery prices soared 10.2% over the same period, according to the latest government data. Across income levels, households are cutting back on spending and finding different ways to manage costs, including dining out less and taking advantage of discounts and store promotions.

People who use BNPL for purchases tend to be more financially distressed than nonusers, according to a March report by the Consumer Financial Protection Bureau. They're also more likely to be an active user of other credit products such as payday loans and credit cards, the report added. People earning $20,001 to $50,000 a year, as well as Black, Hispanic and female consumers, tend to be more regular users of BNPL services.

Consumer advocates are concerned about the risks associated with BNPL services, which are usually less regulated than credit-card services and come with more opaque fees.

Like credit cards, BNPL services often charge extremely high interest rates if consumers don't repay their loan on time.

"While a pay-in-four plan doesn't usually charge interest, longer-term BNPL plans may charge an annual percentage rate up to 30%," an article in Nerdwallet noted in 2022 "Fees, like for late or rescheduled payments, range from $1 to $10 and are sometimes capped at 25% of the purchase value, depending on the company."

"If you're struggling to pay your bills or start an emergency fund, steer clear of buy now, pay later. Because of its convenience, it's easy to overspend with BNPL," the article added. "If that happens, you may incur high fees or be sent to collections, which will hurt your credit score."

Also read:

'Buy now, pay later' revenue jumped 72% last week. That's a double-edged sword for consumers

The buy now, pay later wave: Afterpay, Klarna, Affirm and rivals hope to take U.S. by stormBuy now, pay later vs. credit cards -- which one is better for you? The answer may surprise you

Listen to the podcast:

Best New Ideas in Money: Buy now, pay forever

-Zoe Han

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03-25-23 0817ET

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