The buy now, pay later boom: A sweet sundae of easy credit and fintech push

What is buy now, pay later?

The term "Buy Now, Pay Later" (also known as BNPL) refers to a shopper who takes their purchase home but pays for it within a certain amount of time. If you've been shopping recently, you've probably been offered the "buy now, pay later" (BNPL) option - in other words, split the transaction into installment payments.

Getting a little extra time to pay can seem like a great deal if you're on a tight budget. More consumers are choosing to buy now and pay later, allowing you to spread bill payments over additional weeks, usually without interest or fees. Buy now, pay later Apps allow you to make online purchases and pay for them over time in weekly, bi-weekly or monthly payments. The plan you are offered will also vary by provider, but many companies offer a “Pay in 4” model, which divides your purchase into four equal installments, each due two weeks apart, with the first payment due immediately.

For example, if your total purchase is $300, you'll pay $75 at checkout, then pay the remaining three payments of $75 within two weeks.

BNPL can be a good option if you can afford what you want to buy and plan on how to pay for it. If the item you want to buy is not available through BNPL, or if your charges exceed what you can pay in monthly installments, you can use a credit card. After all, the BNPL option allows consumers to pay for purchases without using a credit card.

What is the buyer experience with BNPL?

In most cases, BNPL applications offer great deals if you pay the balance on time. Most BNPL apps don't have much of an impact on your credit report, and many of them don't report timely payments to credit bureaus. Many BNPL programs will not report your payments to credit bureaus on time, so it won't matter to your credit score if you make regular payments. If you do not make payments in accordance with the agreement or cannot pay the entire purchase before the end of the interest-free period, some BNPL applications will begin to assess interest accrual.

Loans may charge interest or average interest rate (APR) even if the consumer pays the installments on time and in full. While companies like Klarna, Splitit or AfterPay offer this interest-free solution. For example, if you purchased $200, you might see a BNPL payment option that allows you to pay in four interest-free installments of $50 each. A typical BNPL interest-free offer might split the purchase into four equal payments, the first at the cashier and the other three paid every two weeks. Instead of paying the full purchase amount, BNPL allows you to spread the cost in smaller amounts over a short period of time (usually weeks or months).

For example, BNPL processors may charge fees to merchants that offer flexible payments, which can increase the cost of goods and services. In addition, BNPL companies charge consumers a late payment fee if they do not make payments on time. If you select "Buy Now, Pay Later" at a participating retailer's checkout (online or in-store), the invoice will be paid in full by the BNPL supplier.

According to a recent study by Credit Karma, 34 percent of consumers who used BNPL services fell behind on one or more payments. Of those, younger shoppers were far more likely to fall behind, with more than half of Gen Zers and millennials reporting they missed a payment vs. 22 percent of Gen Xers and just 10 percent of baby boomers. Critics are concerned that BNPL may unnecessarily increase personal debt.

If you don't make your payments on time, or don't pay off your balance before the end of the interest-free period, you may face high interest and late fees. For example, if you miss payments or don't pay, you will have to deal with a BNPL loan like you would with any other type of loan. Your credit score is an important factor in determining the terms of your personal loan, which is why you may pay a much higher interest rate on a personal loan than on BNPL if your credit is not in good standing. Whether Buy Now, Pay Later (BNPL) will affect your customers' credit score depends on the terms of the service you offer them.

When someone requests a purchase now, they pay off the loan later, most services typically run soft credit checks that they say help assess whether they can afford the purchase. But consumers should be aware that some BNPL services use a physical credit check.

Choosing BNPL options that perform credit checks and report payment activity is a little more risky in terms of creditworthiness, but if you use them sparingly and pay on time, they can work in your favor, especially if there are no hard requirements or relationships. BNPL plans can provide leeway to repay without losing credit.

Loans are presented as a deferred payment option that typically allows someone to split a purchase into smaller payments, often with a 25% down payment. Installment loans, designed for consumers making purchases over $300, allow payment over a longer period (six to 48 months) and may or may not charge interest depending on how the merchant funds the program. The market is changing rapidly and some fractional payment providers are now starting to offer longer term installment loans and vice versa.

Use of BNPL has seen astronomical growth

According to Fiserv's internal research, a large number of online merchants offer BNPL solutions, and many more are considering adding this payment solution. As more consumers become familiar with BNPL, some buyers are actively looking for dealers who offer in-store payment solutions.

The payment option has helped drive $97 billion in e-commerce sales in 2020, according to research from payments giant Worldpay — and it’s growing fast. The same study estimates BNPL will grow from 2.1% of 2020 global e-commerce transactions to 4.2% by 2024.?

Looking forward

Going forward, strong partnerships with merchants and integrations across e-commerce platforms will be important for long-term success in the BNPL space. Thus far, the BNPL goto-market playbook has focused on prominent retailer sign-ups, technology integrations, and platform partnerships.

Until next time..

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Sources:

https://www.forbes.com/sites/robertfarrington/2021/08/17/the-dangerous-rise-of-buy-now-pay-later-offers/?

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