Buy now/pay lenders focus on niches hit hard by inflation

Even given the economic and political scrutiny facing buy now/pay later lending, CarParts.com exec Ryan Lockwood contends the product can safely fund expenses that are outside of a consumer's normal budget. 

"I think of a single mom who is trying to get her kids to school or a firefighter who obviously can't do his job over Zoom," said Ryan Lockwood, chief financial officer of CarParts.com. "These are people who need to have a reliable car but, given the economy, might not have that disposable money lying around for a sudden and unexpected repair."

Auto repair marketplace CarParts.com, which partners with PayPal to offer buy now/pay later loans, plans to expand the scope of its BNPL program for automotive expenses. At the same time, BNPL lender Affirm has partnered with travel search engine Kayak to power BNPL for travel payments. While these use cases are different, both provide an alternative to credit cards for one-off purchases that can be more expensive than anticipated. 

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CarParts.com is addressing a gap in consumer savings. Forty-seven percent of Americans have less than $500 set aside for out-of-the blue costs, according to Prudential. "Car repair can be expensive and unexpected," Lockwood said. "Having a buy now/pay later option is a good way for people to keep their car on the road if an unexpected emergency occurs," 

A brake set, for example, can cost about $500 per axle, according to AutoZone; a catalytic converter can cost $200. CarParts.com's BNPL loan covers the parts, but currently does not cover the installation expense, which can vary depending on the repair. CarParts.com is planning to add installation costs to its BNPL program in the coming months. The firm sees an opportunity, since BNPL is not widely used for auto repairs, despite the expense. 

CarParts.com offers Pay in 4 for purchases between $30 and $1,500, and Pay Monthly (repaid over six, 12 or 18 months) for purchases between $199 and $10,000. "Being able to spread out the cost of parts might be what allows consumers to afford the repairs," Lockwood said. 

PayPal, which manages underwriting for CarParts.com's BNPL loans, did not return a request for comment by deadline. "The underwriting is fast and the confirmation usually happens within seconds, which is a great benefit to our customers," Lockwood said.

Unlike auto repairs, travel is already a common use case for BNPL. As more people travel following the easing of pandemic restrictions, Affirm, which lost about $20 billion in market capitalization in 2022, is doing more in the travel category as part of a broader merchant expansion strategy.  Kayak enables Affirm to increase its focus on a specific niche, while Affirm's partnerships with Amazon and Walmart address even more use cases.   

The impact of inflation can make a trip more expensive than a traveler may have planned. Kayak's search data shows flight prices have increased 40% over the past year, but overall searches are up 46%, suggesting the higher prices are not hurting demand for travel booking. Hotel prices are about 18% higher than before the pandemic, according to NerdWallet. 

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Kayak travelers who use Affirm at checkout can split the cost of flights, hotel, car rentals and ride-sharing apps into monthly payments. Kayak did not return a request for comment, and Affirm did not provide comment for this article.

"The cool thing about travel, it's kind of a sweet spot for what we know how to do," said Max Levchin, CEO of Affirm, responding to an analyst's question about opportunities in travel during an earnings call in November, about two months before Affirm announced the Kayak partnership.  Levchin said that in most cases, consumers no longer pay directly at the hotel's front desk when checking out, but  leave their hotel key in the room.  

"And so the exact mechanics of this transaction are now real. We know the total amount. And now we're going to turn it into a loan and you'll pay it over time," Levchin said. 

The focus on specialized use cases for BNPL comes as regulators are examining how the product contributes to consumer debt. The Consumer Financial Protection Bureau has issued a roadmap to guide stricter regulation. And several companies in the BNPL category have struggled financially, creating pressure on lenders to diversify or expand in areas of existing strength. 

The amount of BNPL debt in the U.S. grew from $2 billion to more than $24 billion between 2019 and 2021, according to a CFPB report issued in the fall of 2022. The CFPB also found late fees have increased to more than 10% of loans, from less than 8% in 2019, and nearly 14% of loans had some portion of the purchase returned in 2021, up from 12% in 2019. And BNPL lenders' profit margin shrunk to 1.01% at the end of 2021 from 1.27% in 2019.

Partly in response to the economic pressure on consumers, the U.K.-based BNPL lender Zilch this week partnered with StepChange, a debt advice organization. Zilch will make financial contributions to the nonprofit StepChange, and will incorporate StepChange's tips into Zilch's user experience. StepChange offers steps for people who are in financial distress. 

Firms that are an alternative to BNPL lending also see an opening.  

"The increase in exposure to buy now/pay later is compounding the consumer use of credit," said Michael Hershfield, founder and CEO of Accrue Savings. Accrue offers a "save now/buy later" product, which is designed to be the opposite of BNPL. Consumers use Accrue to set up a savings schedule, with a dashboard tracking progress toward a purchase price. When the goal (such as a hotel stay) is reached, Accrue issues a debit card for the merchant and purchase. 

The proliferation of BNPL use cases into travel and other niche markets will expand debt accumulation, Hershfield contends. "People will be buying things they can't afford," Hershfield said, adding Accrue is more geared toward goods and services, including travel, rather than emergency repairs.  

When the market is in a recession, even a mini-recession, this creates a fundamental need for flexible payment options like BNPL, which leads to diversification of BNPL use cases, said Yaacov Martin, co-founder and CEO of Jifiti, a firm that supports installment payment programs for banks and other financial institutions. 

"In the current market, BNPL has become a must-have instead of a nice-to-have for a broader scope of use cases," Martin said.