Buy Now Pay Later is Booming ... Financial Institutions Need to Pay Attention

Buy Now Pay Later (BNPL) is back in headlines, but for reasons that signal growing financial strain rather than consumer convenience. What was once positioned as a flexible financing option for larger discretionary purchases is increasingly being used to cover everyday expenses such as groceries, gas, utilities, and household costs. Persistent inflation, elevated interest rates, and ongoing economic uncertainty are putting pressure on consumers’ wallets. The result? More households are turning to short-term installment financing simply to manage their day-to-day expenses.

While fintechs like Klarna, Affirm, and Afterpay continue to dominate the BNPL landscape, their growth underscores a broader gap in the market: traditional financial institutions have yet to fully address consumers’ small-dollar, short-term credit needs. For banks and credit unions, this presents more than a competitive challenge; it is a strategic opportunity to reestablish relevance in consumers’ everyday financial lives and reclaim a space they are competitively positioned to serve through trusted relationships, responsible lending, and financial wellness support.

Buy Now, Pay Later: The Evolution

To understand the urgency of the situation, it’s important to examine the evolution of Buy Now, Pay Later. Initially, BNLP gained traction as a tool for financing discretionary purchases such as fashion, electronics, and other big-ticket retail items. It was positioned as a convenient alternative to traditional credit, embedded seamlessly at checkout.

Today, that case has fundamentally shifted. BNPL is increasingly being used to purchase necessities. What was once a point-of-sale financing juggernaut has since become a day-to-day cash flow management strategy. For many financially stretched households, BNPL is no longer occasional; it’s habitual. This comes as reports show credit card debt has reached $1.33 trillion and delinquency rates have risen to their highest levels since 2020.

As a growing number of consumers live paycheck to paycheck, installment payments are becoming the norm of everyday budgeting, notably among younger consumers. As the heaviest users of BNLP, Gen Z and Millennials are demonstrating an obvious preference for flexible, transparent payment options over traditional credit cards.

Why Banks and Credit Unions Must Pay Attention

Banks and credit unions can’t afford to sit this one out. BNPL has taken off because fintechs moved fast to solve a problem many traditional institutions largely left alone - offering simple, instant, small-dollar installment options that fit how people manage cash flow today.

BNPL providers aren’t just winning loans; they’re winning a spot in consumers’ day-to-day financial lives. That’s the real risk for banks and credit unions: not shrinking loan volume but fading into the background of their customers’ routines. The upside is that most traditional institutions are better equipped to respond than fintechs. They already have what challengers are trying to build: trusted relationships, rich customer data, and a deep view of core accounts and transactions.

The goal isn’t to copy the fintech playbook. It’s to offer smarter, more responsible BNPL-style experiences that reflect each customer’s real financial picture and support long-term financial health. By meeting customers where they are today with transparent, right-sized options, banks and credit unions can stay central to everyday money decisions while helping people build a stronger financial future.

Opportunities for Financial Institutions

Banks and credit unions are already equipped to offer better options to Buy Now, Pay Later, starting with small-dollar installment lending designed around consumer needs. Unlike fintechs, banks and credit unions can leverage existing account data to underwrite smarter, resulting in more informed decisions, lower risk exposure, and better outcomes for both the financial institution and consumer.

Just as importantly, these solutions don’t need to live outside the customer experience. By embedding lending directly into digital banking platforms, financial institutions can meet customers/members where they want to bank. That could mean enabling smaller installment options within online and mobile banking, or even allowing customers to split larger debit transactions into more manageable payments, bringing flexibility without pushing them toward fintech providers.

Beyond the product itself, there is also an opportunity to lead with financial wellness. By educating customers/members on responsible borrowing, clearly communicating fees and offering transparent repayment structures, banks and credit unions can differentiate.

Next Steps

The path forward requires financial institutions to move from awareness to execution. That begins with evaluating customer/member demand, understanding how, when, and why account holders are turning to installment solutions and identifying gaps in current offerings.

From there, financial institutions should assess the right mix of building internally versus partnering with third-party providers. At the same time, investing in real-time underwriting capabilities will be critical to delivering the instant decisions consumers increasingly expect without compromising risk management.

Most importantly, positioning matters. This is not about competing on “easy credit.” It is about leading on financial wellness by providing flexible, transparent tools that help customers and members manage cash flow responsibly.

The financial institutions that get this right will do more than close the BNPL gap, they will strengthen trust, deepen relationships, and redefine their role in their customers’ and members’ financial lives. Engage fi offers advisory services to help banks and credit unions build and execute payments strategies that allow them to scale and grow.