Table of contents

1. What is a ‘Buy Now, Pay Later’ loan?
2. How ‘Buy Now, Pay Later’ actually works
3. Popular BNPL Providers
4. Consumer Behavior Shifts
5. BNPL’s impact on retail industry
6. Can consumers benefit from using BNPL?
7. The biggest drawbacks of BNPL
8. Conclusion

Introduction

In recent years, the landscape of consumer finance has seen a significant transformation with the advent of "Buy Now, Pay Later" (BNPL) services. This payment method has surged in usage, providing consumers with a convenient way to make purchases without immediate full payment – perhaps a bit too convenient, as it turns out.

In this article, we'll delve into the concept of Buy Now, Pay Later, its mechanisms, benefits and drawbacks, and its impact on the retail industry and consumer behavior.

What is a ‘Buy Now, Pay Later’ loan?

Buy Now, Pay Later is a type of short-term financing that allows consumers to make purchases and pay for them over a period of time, usually in installments – 4 installments spread over 6 weeks is a common option. BNPL loans often come with no interest fees, if payments are made on time, but may also lead to high interest and late fees. This payment option is increasingly integrated into online shopping platforms and brick-and-mortar stores and is on the rise among younger demographics.

How ‘Buy Now, Pay Later’ actually works

• Selection of BNPL at checkout: When making a purchase, consumers can choose BNPL as their payment method at checkout.

• Approval process: While some BNPL providers perform a “soft inquiry” credit check (which does not affect your credit score), most of these services do not actually have a minimum credit score required to be approved for a BNPL loan.

• Payment plan: Upon approval, the consumer agrees to a payment plan, typically involving equal installments spread over weeks or months.

• Initial payment: The first installment is usually due at the time of purchase, with subsequent payments automatically deducted from the consumer’s bank account or charged to their debit/credit card.

• Notifications and reminders: Consumers receive notifications and reminders for upcoming payments through the BNPL service’s app.

Popular BNP providers

Several BNPL providers have emerged as leaders in this space, each offering slightly different terms and conditions. Some of the most well-known providers include:

• Afterpay: One of the pioneers in BNPL, Afterpay splits payments into four equal installments due every two weeks.
• Klarna: Offers various payment plans, including pay later, pay now, and financing options.
• Affirm: Affirm allows consumers to choose payment plans ranging from a few months to a year.
• PayPal's Pay in 4: Allows users to split purchases into four interest-free payments.

Consumer Behavior Shifts

Installment plans are not a new thing, but BNPL has influenced consumer behavior significantly in recent years, especially among younger demographics. Millennials and Gen Z, in particular, have shown a preference for using BNPL over traditional credit cards and according to a study by Forbes, BNPL has grown 600% among Gen Z consumers since 2019, while the rate for Millenials has more than tripled. 

Impact on retail industry

Retailers have embraced BNPL due to its positive impact on their sales. By offering BNPL options, retailers are attracting a broader customer base, increasing average order values, and reducing cart abandonment rates. However, what’s good for the retailers isn’t necessarily what’s best for the consumers. 

Can consumers benefit from using BNPL?

The answer is: it depends on who is using it. When you search this question online, a lot of the arguments listed as benefits of ‘Buy Now, Pay Later’ could just as well be listed as hazards of using it, including examples like:

• “No Credit Checks: BNPL services are often easier to qualify for compared to traditional credit cards.” – While this is true, there’s a reason why credit card lenders do credit checks and don’t give out new loans or lines of credit to people who have a recent history of mismanaging loans.
  
  
• “Immediate Gratification: Consumers can receive their purchased items immediately without waiting until they have the full amount.” – Also true, but learning to demonstrate constraint and delaying gratification is an important part of being financially responsible.
  
  
• “Interest-Free Periods: Many BNPL services offer interest-free periods if payments are made on time.” – And that’s a big if, because the truth is a lot of people end up not being able to pay according to the original payment schedule, and that interest free loan then turns into a high interest loan.

If you feel confident in your ability to not overspend or miss any payments, then BNPL might prove beneficial, but it can be a slippery slope.

The biggest drawbacks of BNPL

• ‘Buy Now, Pay Later’ leads to overspending: The ease of BNPL can lead to impulsive buying and overspending – and it’s by design. One major BNPL service called Klarna actually brags in their materials directed towards retailers that consumers will on average spend 45% more if their service is offered as a checkout option.
  
  
• Fees and interest: As mentioned above, ‘Buy Now, Pay Later’ is often advertised as being interest free, but late payments can incur fees and, in some cases, high interest rates. A group of researchers found that consumers racked up at least $176 more per year in overdraft fees, interest and late fees after starting to use BNPL services.
  
  
• Negative impact on credit score: Missed payments are reported to the credit bureaus and will negatively affect the consumer's credit score.
  
  
• On-time-payments don’t build credit: On the flipside, positive on-time-payments made through BNPL services are not reported to the credit bureaus and therefore won’t help improve your credit score.
  
  
• Debt accumulation: Using BNPL services, and especially using multiple simultaneously, can lead to overspending and result in unmanageable debt.

Conclusion

Buy Now, Pay Later has with no doubt revolutionized the way modern day consumers shop. And while on the surface it may seem like it comes with alluring benefits – such as immediate access to goods and interest-free periods – it also poses risks like overspending, high interest due to missed payments, and debt accumulation.

As BNPL continues to evolve, consumers and retailers alike must navigate its landscape carefully, leveraging its advantages while mitigating potential pitfalls, and might want to consider looking into other alternatives for ways of splitting up large payments.