Buy Now Pay Later (BNPL) services exploded onto the online shopping scene a few years ago, and according to various studies over the past 18 months, they are only going to get bigger.
BNPL services like Sweden’s Klarna have seen their user base skyrocket during the pandemic, and are even now integrating with in-store point of sale systems.
But how this is changing consumers’ approaches to debt, along with the fact that the industry is new and largely unregulated, has retailers and financial institutions concerned.
What are BNPL services and how do they work?
You’ve probably had the option of using a buy now, pay later service when you enter your payment information to check out on an online store.
Some BNPL services allow you to defer your payment for thirty days, while others give you the option of paying for items in smaller increments, such as $5 per week for five weeks instead of $25 in a single transaction.
Generally, BNPL services do not charge interest (although some still do), while others charge late fees. Others charge a small transaction fee on each purchase.
E-commerce platform Shopify claims that BNPL’s services decrease the chances of a customer abandoning their shopping cart, and RBC Capital Markets estimates that it could increase conversion rates by around 20-30%.
This is how they make their money – by taking a cut of whatever the customer pays, provided they buy a lot more due to the presence of the service.
Buy now, pay later for explosive growth
Buy Now Pay Later services have become particularly popular in countries like the United States, with user bases growing exponentially during the pandemic.
Their newfound popularity and subsequent value are perhaps best illustrated by recent acquisitions. First Square POS Supplierfor example, announcement in August that it planned to acquire BNPL Afterpay for $29 billion and integrate it into its systems.
According to a survey earlier this year, 55.8% of US consumers would also have used one, compared to 37.65% in the summer of 2020.
According to Adobe, which has analyzed more than a trillion visits to American e-commerce sites, the use of BNPL’s services has increased by 215% year after year in January-February 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 worth of products. They also estimate that by the end of 2021, $100 billion in purchases will be made using these types of services, more than four times the 2020 figure.
But the phenomenon is not unique to the United States. According to Finder, 4 in 10 Britons have used a BNPL service at least once, and around 9.5million people in the UK say they avoid buying from stores that don’t offer them at checkout.
Between January and July 2020, when the UK went into lockdown, 986,000 Britons downloaded the Klarna app, the most popular BNPL in the country. However, at the end of 2018, this figure was only 14,000.
So what’s the catch?
For many millennial spenders, who relish the ability to spread out or defer payments while struggling financially, there is none.
But that’s not all. The rapid growth of the industry means that there is very little regulation that applies to this category of financial entities. These services do not have to do accessibility assessment checks, for example, unlike other organizations that offer loans.
Besides the lack of regulation, there is the problem of immediacy and simplicity. When you use a BNPL service, you are entering into a credit agreement – but buyers are unlikely to truly understand this and treat it the same as they would any other type of loan.
Is it possible to expect someone to know what they are agreeing to or agreeing to in a process that can be completed with just a few clicks?
A 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 are financially stable enough to pay what you have to pay when you have to pay it – whether in a lump sum payment in a month or in installments over a few weeks – then these BNPL companies are a great option for you. .
They’re great for small purchases like buying a few clothes, but remember that the more money you defer to one of these businesses, the greater the success will be at the end of the month (or whenever that you will be paid).
If you find yourself using the Services regularly and subsequently miss payments – or make increasingly larger purchases – you may end up paying more than if you had just prepaid if you choose to borrow from a service that charges late fees. .
Treat Buy Now, Pay Later services as you would any other loan – don’t borrow beyond your means and make sure you have a clear idea of how and when you’ll pay it back.