Buy now, pay later (BNPL) have become increasingly popular in recent years. As more young adults turn to these funding options, companies like Confirm (NASDAQ: AFRM), additional payment (OTC: AFTP.F), and Klarna have seen revenue growth accelerate.

Investors should expect the industry to continue growing rapidly. However, there are other factors to look out for, including increased scrutiny from regulators as well as consumer credit rating companies that are paying more attention to these types of lenders. You should adopt a wait-and-see attitude with BNPL companies as more competitors are entering the space. Here are four trends that smart investors should watch out for as 2022 begins.

1. More online consumers will turn to BNPL

The growing popularity of BNPL options is particularly strong among Millennials and Generation Z. According to a survey by NerdWallet, 1-in-5 shoppers were using BNPL options in 2021, with 22% of respondents being Gen Z customers.

Additionally, several retailers added BNPL options over the past year, including large retailers like aim and Amazon. They turn to BNPL because they increase sales.

In a study by accent and funded by Afterpay, BNPL transactions accounted for around 6% of all online spending in 2021. The advisor anticipates a steady increase in the use of this type of funding, and the company predicts that 13% of all online transactions will be through BNPL loans by 2025.

2. Large companies will pursue their own BNPL products

One driver of BNPL loan growth is more companies developing their own BNPL products. One company that has expanded at BNPL is PayPal, which bought Japan-based BNPL lender Payy for $ 2.7 billion in September. Block, formerly known as Square is another company that made a splash in the BNPL market when it bought Australia-based Afterpay for $ 29 billion in August.

Banks could also expand into this area. According to McKinsey, banks lost $ 10 billion in annual revenue to fintechs offering BNPL products. In September 2021, Goldman Sachs spent $ 2.2 billion to buy GreenSky to strengthen its consumer finance unit. Ruby Walia, a consultant for digital banking and advisory firm Mobiquity, told Yahoo that he expects more banks to adopt BNPL products over the next year, which further increases competition.

3. Regulators will step up their scrutiny of these loans

With BNPL’s explosive popularity among younger adults, the Biden government is likely to be more critical of these companies. Founded under former President Barack Obama, the Consumer Financial Protection Bureau (CFPB) has asked BNPL companies including Affirm, Afterpay and PayPal to provide the agency with information about the risks and benefits of BNPL options.

One problem is that BNPL products offer less protection than credit cards. For example, returning goods or challenging fraudulent or inaccurate charges under BNPL programs can be much more difficult. The CFPB is also concerned about how much debt consumers are running and how much data is being collected about their spending patterns.

These BNPL companies have until March 1 to submit this data, which could result in their business practices being subject to increased scrutiny.

Image source: Getty Images.

4. Creditworthy companies will begin adding these credits to credit reports

Finally, consumer credit scoring companies will be paying more attention to BNPL loans, which are likely to play a more prominent role in credit reports than they have in the past. In general, most BNPL lenders have not reported payment history to credit bureaus unless the loan has been sent to a debt collection agency.

Credit scoring company Experience said it had already put BNPL loans on consumer credit reports. In the meantime, Equifax said it would start adding BNPL loans to consumer credit files starting next month.

As BNPL loans become increasingly popular for online transactions by younger consumers, it is good to see that rating agencies are paying more attention to these loans, which can help those with lower credit scores build a credit history.

More control is good

This year should be interesting for the BNPL industry. Increased regulatory oversight and interest rates from credit scoring firms will treat BNPL loans more like traditional loans. I think this could legitimize these payment options in the long term and at the same time protect consumers.

Increased competition from banks and other large corporations could challenge many of these BNPL companies. In the years to come, we could see more industry consolidations and acquisitions that continue the trend set by PayPal, Block, and Goldman Sachs last year.