Whether you’re shopping for a new summer wardrobe, buying exercise equipment, booking travel, or making many other purchases either in-store or online, you likely have more ways to pay than ever before. Cash and checks may be fading, but in addition to growing credit card usage, consumers also have new options like Buy Now, Pay Later (BNPL) services.
Lately, however, credit card providers have also started to offer pay-over-time options that are similar to BNPL services, while some BNPL providers have also launched credit cards.
What is BNPL?
As the name suggests, BNPL allows consumers to buy something now while paying for it over time, often split into four equal payments over six weeks, although the terms may vary depending on the BNPL provider and the consumer’s choice. In many cases, these installment payments do not incur interest charges, but some BNPL loans have origination fees, and you might have late fees or credit score consequences for missed payments.
Nearly half of U.S. consumers have used BNPL services, such as Klarna or Affirm, and this usage is even more pronounced among younger consumers, with 64% of Gen Z having BNPL experience, according to a LendingTree survey.
For many shoppers, BNPL is an appealing alternative to credit cards due to its convenience and lack of interest charges, according to Federal Reserve research. However, Consumer Financial Protection Bureau (CFPB) research finds that BNPL users tend to also carry more debt, such as from credit cards, suggesting that some users are turning to BNPL to finance even more than they traditionally could — or perhaps should.
How are the lines between credit cards and BNPL blurring?
BNPL and credit cards have always had the similarity of allowing you to purchase something now while paying for it later. Yet the difference has typically been that credit cards have one particular payment date where you must pay for the item (and any other purchases from that statement period) in full, otherwise interest accrues, while BNPL splits the payment up into multiple smaller chunks, without interest.
However, credit cards have increasingly been offering payment plans that allow you to split a particular purchase up into multiple equal payments over several months. Instead of charging traditional interest, these payment plans often come with fixed monthly fees. That might make them more expensive than some BNPL options, though you have to closely compare all the fees that might not always be easy to decipher at first glance.
That said, while BNPL usage has been growing steadily, the proportion of those who have converted a credit card purchase into an installment plan has been relatively low and not changed much year over year, says David Shipper, strategic advisor at Datos Insights, an advisory firm that provides data, insights, and advisory services to companies within the financial services, insurance, and retail technology industries. “Ultimately, using BNPL to make the purchase is straightforward, while converting a credit card purchase to a term loan after the purchase is not,” he says.
One upside, though, is that you might prefer to handle everything through one credit card provider, instead of juggling credit cards alongside BNPL loans from a separate service. Credit cards also might have stricter controls about how much or what you can finance through installment payments, which some consumers might prefer as a way to prevent them from going overboard on BNPL.
Meanwhile, BNPL providers are increasingly moving into the traditional credit card space. For instance, Klarna recently launched a credit card that offers consumers flexible payment options, including installment plans or the more conventional end-of-month payment.
Some BNPL providers like Zip also offer virtual cards as a way for merchants to accept BNPL payments, even if the store is not set up for that ordinarily. The payment terms are still generally the same as they are for traditional BNPL, but the payment experience at the point of purchase might look more like checking out with a credit card.
Choosing between BNPL vs. credit cards
While BNPL providers and credit card companies are starting to look more similar, that doesn’t have to make the choice more difficult for shoppers.
“Rather than confusing consumers, this convergence shifts their focus from product type to brand experience and value,” says Sunil Sachdev, SVP, head of embedded finance at Fiserv, a leader in providing technology solutions and services to the financial services industry.
In other words, as the lines blur, it’s not so much about choosing between BNPL vs. credit cards but rather choosing among financial services companies that offer what consumers are looking for, factoring in fees, rewards, user experience, etc.
“The payment vehicles consumers choose come down to who understands their habits, who offers contextual incentives, and who helps consumers budget effectively,” says Sachdev. “Ultimately, the best choice is the one that offers transparency, control, and value in a way that aligns with the consumer’s lifestyle.”
So, while you want to carefully consider what payment options align with your financial needs and preferences, you don’t have to get too caught up in whether that technically means using a BNPL company or a more traditional credit card provider. In the future, that distinction might even fall away completely.
“Over time, it is possible that BNPL, as a stand-alone product issued one purchase at a time, may become obsolete, and cards will be the primary method for activating these products. The biggest question will be whether the card is issued by a fintech like Klarna or PayPal, or by a major bank such as American Express or Capital One,” says Shipper.
