Buy Now Pay Later (BNPL) services exploded onto the online shopping scene a few years ago, and according to various studies conducted over the last 18 months, they are only going to get bigger.
BNPL services like the Swedish-based Klarna have seen their user base soar during the pandemic, and now even integrate with in-store POS systems.
But the way it changes consumer approaches to debt, as well as the fact that the industry is new and is largely unregulated, is causing some concern amongst retailers and financial institutions.
What are BNPL Services and How Do They Work?
You’ve probably already been given the option to use a Buy Now, Pay Later service when you’re inputting your payment information to check out on an online store.
Some BNPL services let you postpone your payment for thirty days, whereas others give you the option to pay for items in smaller increments, such as $5 a week for five weeks instead of $25 in one transaction.
Typically, BNPL services do not charge interest (although some still do), whereas others charge late fees. Others take a small transaction fee on each purchase.
Ecommerce platform Shopify claims that BNPL services decrease the chances that a customer will abandon their carts, and RBC Capital Markets estimates that this could increase conversion rates by around 20-30%.
This is how they make their money — by taking a cut of whatever the customer pays, on the proviso that they’re buying a lot more due to the presence of the service.
Buy Now Pay Later’s Meteoric Growth
Buy Now Pay Later services have become particularly popular in countries like the US, with user bases increasing exponentially during the pandemic.
Their newfound popularity and subsequent worth are perhaps best illustrated by recent acquisitions. Leading POS supplier Square, for instance, announced in August that it planned to acquire BNPL company Afterpay for $29 billion and integrate it into its systems.
According to a survey from early this year, 55.8% of US consumers have reportedly used one too, compared with 37.65% in the summer of 2020.
According to Adobe, who analyzed over one trillion visits to US ecommcerce sites, BNPL service use had grown 215% year-over-year in Jan-Feb 2021.
Forbes reports that, since its launch, more than 7 million people have used PayPal's BNPL service and purchased more than $3.5 billion of products. They also estimate that, by the end of 2021, $100 billion’s worth of purchases will be made using these types of services, more than four times the figure from 2020.
But the phenomenon is not specific to the United States. According to Finder, 4 out of 10 Brits have used a BNPL service at least once, and around 9.5 million people in the UK say they avoid buying from shops that don’t provide one at the checkout.
Between January and July 2020, during which the UK went into lockdown, 986,000 Brits downloaded the Klarna app, the country’s most popular BNPL. By way of contrast, at the end of 2018, that figure was just 14,000.
So, What’s the Catch?
For many millennial spenders, who enjoy the ability to spread out or postpone payments while experiencing difficult financial circumstances, there isn’t one.
But that’s not the whole picture. The rapid rise of the industry means that there’s very little regulation that purveys over this category of financial entity. These services don’t have to do affordability assessment checks, for instance, whereas other organizations that offer loans do.
Aside from the lack of regulation, there’s the problem of immediacy and simplicity. When you use a BNPL service, you are signing up for a credit agreement — but it's doubtful shoppers truly understand this and treat it in the same way they would another type of loan.
Is it feasible to expect someone to know what they’re signing up for or agreeing to during a process that can be completed in a couple of clicks?
One recent study conducted by Qualtrics on behalf of Credit Karma found that 34% of BNPL users had missed at least one payment, and more than half of millennials had.
Should you use Buy Now, Pay Later services?
If, in general, you're financially stable enough to pay what you need to pay when you need to pay it — be that in a block payment in a month's time, or in increments over a few weeks – then these BNPL companies represent a great option for you.
They're great for small purchases like buying a few items of clothing but remember — the larger the sum you defer to one of these companies, the bigger the hit it's going to be at the end of the month (or whenever you get paid).
If you're finding yourself using the services regularly and subsequently missing payments — or you're making progressively larger purchases — you may end up paying more than if you'd just paid upfront if you opt to borrow from a service that charges late fees.
Treat Buy Now, Pay Later services like you would every other loan — don't borrow outside of your means and ensure you've got a clear idea of how and when you're going to pay it back.