Why is BNPL popular with Gen Z? The new payment style of buy now, pay later. Hints for creating compelling CX.

When it comes to deferred payments, credit cards have traditionally been the standard. However, in recent years, a new payment method called "BNPL" (Buy Now, Pay Later) has gained popularity worldwide, especially among Generation Z. This method allows for easy deferred or installment payments through e-commerce apps and similar platforms. Many of you have likely seen it in TV commercials for e-commerce sites and QR code payment services.

This article focuses on BNPL, a rapidly growing segment within fintech, and explores the question: "Will BNPL become the primary payment style for Generation Z?" Understanding the BNPL mechanism, its advantages, and why it resonates with Gen Z should also lead to insights into their purchasing behavior and help create customer experiences that truly connect with them. If you're grappling with questions like "How can I make marketing targeting Gen Z more effective?" or "What makes a service design appealing to Gen Z?", this article is worth your reference.

BNPL: A New "Pay Later" Style Replacing Credit Cards

What comes to mind when you think of "pay later"? Many might associate it with credit card installment plans or bonus payments, or perhaps worry about next month's expenses. However, in recent years, "BNPL" has gained attention as a new "pay later" payment style, offering an alternative to credit card payments.

BNPL stands for "Buy Now, Pay Later," a payment style where you literally buy now and pay later. It's rapidly expanding in Western countries and Australia, and is also gaining traction in Southeast Asia, where credit card ownership is low but smartphone ownership is high. Its penetration accelerated around 2020, driven primarily by companies like Affirm (US), AfterPay (Australia), and Klarna (Sweden). In Japan, similar services are emerging primarily on e-commerce sites, such as ZOZOTOWN's "Tsukebai," Merpay (Mercari)'s "Merpay Smart Payment," and Rakuten Pay's "Post-Payment Settlement."

While both BNPL and credit cards are deferred payment services where payment occurs after purchase, BNPL has two major distinguishing features:

1. No prior credit check required, or a very simple one
2. No fees even for installment payments

Credit cards typically require detailed personal information, including address, name, employer, and annual income, and the process from application to card delivery can take several weeks. In contrast, most BNPL services only require registration with an email address or phone number, with approval often completed in just a few minutes. Unlike credit cards, BNPL also offers the significant advantage of no fees for installment payments and no annual fees.

While offering these benefits, BNPL typically provides a small credit limit, often around tens of thousands of yen. It also lacks the supplementary services and point programs that come standard with credit cards.

So why can BNPL achieve such simplified pre-approval? It's because they use unique methods for credit assessment. These can be broadly divided into two approaches:

1.Setting a low initial credit limit
As mentioned earlier, by setting a low initial credit limit and gradually increasing it based on usage history, the risk of unpaid balances is mitigated.

2.AI-based credit assessment
This method is gaining traction in smartphone apps with e-commerce functionality. AI analyzes data within the app—such as purchase history—that relates to repayment ability to determine the credit limit.

In AI credit assessment, the credit review encompasses not only the account information registered in the app but also the user's medium-to-long-term behavioral data within the app. This means that the various pieces of information linked to the account are considered equivalent to the credit information typically associated with credit cards, such as annual income, assets, and family structure. Using this method, a simplified credit check based on collaboration with credit bureaus can be completed in about five minutes.

"I want this now!" Why BNPL aligns with Gen Z's consumption behavior

The previous chapter covered the fundamentals of BNPL and how its systems were established as payment infrastructure matured alongside the rapid growth of e-commerce-enabled smartphone apps. Now, let's examine why BNPL aligns so well with Generation Z.

According to Merpay's 2021 "Survey on Consumption and Payment Methods," approximately 70% (67.2%) of Gen Z respondents purchase goods or services under ¥3,000 "when they feel they want it," and over half (54.4%) "decide to purchase within 30 minutes." One in four respondents (22.8%) even stated they "decide to purchase within 5 minutes."

The reasons cited for making a purchase decision were "wanting to use it as soon as possible" and "fear that the desired item might become unavailable if they waited." One characteristic of Gen Z's consumption behavior is "selective spending," where they are willing to spend money on items they perceive as valuable. However, it may be more accurate to view their perception of value as not necessarily constant but varying moment by moment.

Given this, BNPL seems well-suited for Gen Z users. By presenting the right payment method and price at the exact moment they feel interest or desire ("How much is this right now?"), BNPL enables them to decide "I'll buy it at this price" and complete payment immediately.

But that's not the only reason BNPL aligns well with Gen Z. According to the aforementioned Merpay survey data, reasons for using deferred payment included "Because I can adjust the payment timing (54.0%)" and "Because it's easier to keep track of spending (32.0%)". These responses suggest that while they value "being able to buy what they want right now," they also possess a practicality that wants to "control their spending while still getting what they desire."

Many e-commerce apps offering BNPL focus on management features and user-friendly interfaces, such as allowing users to set their own spending limits or check their total spending in real-time via smartphone. This approach seems to be working: even with a ¥100,000 limit, many users don't max it out, instead managing their spending within comfortable ranges like ¥20,000 to ¥30,000. Many Gen Zers hold negative perceptions of credit cards, citing concerns like "It's hard to track spending and I worry about overspending" or "I'm afraid of accumulating interest." BNPL emerges as a compelling payment style that addresses these very concerns.

"Buy Now, Pay Later" aligns with the behavioral economics concepts of "time preference" and "loss aversion." When offered a choice between "receive 10,000 yen now" and "receive 10,000 yen one month later," most people choose the immediate payment. However, when asked to choose between "pay 10,000 yen now" and "pay 10,000 yen one month later," most people opt to pay later. Behavioral economics has proven that the pleasure of delaying a loss outweighs the immediate gain of receiving a benefit. From this perspective, BNPL makes perfect sense.

What is the new form of CX that resonates with Gen Z?

Building on the discussion of BNPL and Gen Z, we will now explore what constitutes an attractive customer experience for this generation.

While Gen Z is often perceived as less materialistic, as seen in phrases like "young people turning away from XX," this isn't necessarily true. For example, SHIBUYA109 lab.'s 2021 "Survey on Young People's Attitudes and Realities Regarding Money" revealed that Gen Z is willing to invest significant money, time, and passion into supporting artists and entertainment content they love, exemplified by "support consumption" and "affinity consumption." On the other hand, a 2022 survey by Matsui Securities, "Survey on Financial Realities by Generation," indicates that younger generations feel financial anxiety earlier in life, with about half actively cutting expenses and saving.

For the coming era, creating compelling customer and purchasing experiences for Generation Z will likely hinge on two key points: "enabling the convenience of instantly purchasing desired items" and "providing safe and straightforward purchasing methods." Specifically, this involves product appeals that resonate with their values, such as "experiential consumption, participatory consumption," and "supportive consumption, affinity-based consumption," along with streamlined purchase flows enabling instant buying when desire strikes. Other considerations include offering diverse payment methods tailored to individual users and proactive follow-up to prevent excessive debt risks.

To meet Gen Z's real needs—like wanting to buy items that are a bit pricey for their monthly allowance and unaffordable in one lump sum, using fee-free installment payments—it's crucial to align with their consumption mindset and build CX (Customer Experience) from that foundation. To enhance the effectiveness of marketing targeting Gen Z, why not consider incorporating "payment methods," including BNPL, into your strategy?

Unlike credit cards, BNPL emerged as a deferred payment service featuring simple approval and no installment fees, but lacking ancillary services like point programs. Its popularity among younger demographics, primarily Gen Z, likely stems from its alignment with their consumption mindset: "Wanting to buy now," "Being willing to spend on items or services perceived as valuable, even if somewhat expensive," and "Desiring secure shopping while controlling expenses." When creating customer experiences targeting Gen Z, explore ways to enhance CX by designing with payment methods in mind.