New research reveals a growing trend where consumers are turning to buy now, pay later (BNPL) services for everyday essentials, leading retailers to increase prices to expand profit margins and offset transaction costs.

Fresh findings indicate that as more shoppers utilize installment plans through apps like Klarna and Affirm for purchases at the grocery checkout, roughly one in three individuals has used these platforms to pay for fruits, vegetables, milk, and eggs. Economists studying this behavior suggest that such BNPL usage could be inflating grocery costs for all consumers.

A paper from Washington University in St. Louis, slated for publication in the upcoming issue of the journal Management Science, demonstrates that as a growing number of consumers rely on BNPL for essential goods, retailers are increasingly likely to raise product prices while simultaneously reducing their inventory levels. This shift marks a significant change as small, necessity-driven purchases are increasingly being financed through installment plans.

A LendingTree survey conducted in July, which polled over 6,000 American consumers, found that 29% of respondents have used BNPL loans to buy groceries, a figure that has nearly doubled from the 14% reported just two years prior. This surge is driven by a broader social context where rising healthcare and childcare costs, coupled with persistently high inflation, are making BNPL services more attractive. Currently, 91.5 million Americans utilize apps like Klarna, Affirm, and Afterpay for installment purchases. According to data from the Federal Reserve Bank of Richmond, while the volume of BNPL transactions continues to grow, they still represent only about 1% of total credit card transactions.

Leading this research is Panos Kouvelis, a professor of supply chain, operations, and technology at Washington University's Olin Business School. The research team sought to understand what makes the BNPL model appealing to retailers, particularly since they incur merchant fees on every order processed through these platforms. By constructing an economic model that incorporated consumers' willingness and ability to pay using BNPL, alongside forecasting retailer profit expectations, the team discovered that retailers are raising their listed prices to compensate for the merchant fees charged by the platforms. This dynamic effectively means that some consumers who pay in full are subsidizing those who use installment plans, ultimately resulting in higher prices for everyone.

Kouvelis stated in an interview that "when retailers accept these installment payment methods, they raise their prices. Simply put, we are all paying for this kind of business practice."

Consumers' increasing reliance on loans to cover basic necessities like groceries is putting significant upward pressure on prices. BNPL was initially designed for large discretionary purchases such as furniture or gaming consoles, which have higher profit margins that can absorb the installment fees. However, essential items like groceries operate on very thin margins. This shift in consumer behavior not only reflects economic strain but also poses a challenge for retailers, who are forced to raise prices to maintain profitability in their staple goods. If certain products become unprofitable, retailers may choose to discontinue them, further limiting consumer choices. Kouvelis questioned the incentive, noting, "Why should retailers stay in this business? Unless they expect customers to buy a host of other items alongside, they need other products to make money."

The use of BNPL for necessities also introduces additional risks. This financial technology product has long operated with limited regulatory oversight, and platforms have historically refrained from reporting such debts to credit bureaus. Kouvelis explained that this has created a situation where some consumers accumulate significant "invisible debt," potentially holding 5-10 BNPL loans at the same time. LendingTree data shows that 47% of BNPL users have experienced a late payment in the past year. While the overall scale of this debt remains modest and consumers tend to prioritize repaying short-term installments, Kouvelis points out that the potential risks to both consumers and retailers are real, even without a large-scale economic shock.

"The risk is there," he said. "Some people living on the edge are already over-leveraged, and no one is aware of it. That is very dangerous for them; debt problems will inevitably culminate... For retailers, these customers will compress profit margins and directly impact the bottom line."