Hard up for cash? Unable to buy the things you want right now? Well, the Buy Now, Pay Later (BNPL) concept may be the thing for you. BNPL allows you to split the cost of your purchases into a few equal instalments, so you’ll get your purchase upfront while you pay the balance later. Of course, like any other payment scheme, BNPL isn’t without drawbacks. Remember, these companies are trying to make a profit, one way or another…!
BNPL is a relatively new concept that has started to gain traction, especially amongst millennial and Gen Z shoppers. Due to worldwide lockdowns during the Covid-19 pandemic, e-commerce volumes have skyrocketed, and with it, the concept of BNPL. While BNPL currently reflects only a small portion of overall spending on payment cards (e.g. credit cards and debit cards), it is estimated to grow by 10 to 15 times its current volume by 2025! So it’s best to know the ins and outs of BNPL.
BNPL has two main goals. Firstly, it aims to provide a convenient and seamless checking-out process for consumers, while maintaining transparency and flexibility. Secondly, it aims to increase the volume of sales for merchants. (But never forget that the real goal of the BNPL scheme is to make money for the BNPL operator!)
BNPL can work in one of two ways: Split instalments or Point-of-Sale Financing
In both cases, the BNPL firm pays for the initial purchase while your instalment payments will go to them thereafter. Any late fees or processing fees will also be paid to your BNPL firm. As such, the BNPL firm acts as a sort of guarantee on your behalf when dealing with the merchant.
It is important to note that not every merchant is partnered with every BNPL firm as well.
Competition amongst BNPL firms is booming; in Singapore, there are already at least 10 BNPL schemes available for you to choose from (some of which are provided by the local banks)!
As such, you can expect to see more diverse offerings and features from BNPL firms and existing payments companies in the coming years.
How Does BNPL Affect Merchants?
Partnering with a BNPL firm means that the merchant will be paying hefty commissions to the BNPL firm in exchange for the new payment scheme for their products. This BNPL scheme typically leads to an increase in sales volume which is beneficial to the merchant. The longer-term question is if this volume effect will still work when all that merchant's competitors also start offering BNPL!
For every sale made on BNPL instalments, the BNPL firm will pay the full purchase price minus the hefty commissions (typically up to 6%) to the merchant for the goods. The customers will then pay the instalments to the BNPL firm. As such, the merchant isn’t directly bearing the risk of the customer defaulting on payments, but this credit risk still indirectly affects them through the commission and fees.
BNPL firms calculate the fees and commissions based on the level of customer credit risk that they intend to take on. Typically, they charge commissions considerably higher than bank processing fees. This extra charge is meant to reflect the credit risk that BNPL firms bear and hence, in a way, the expense to the merchant reflects credit risk.
This extra expense may cause the merchant to push product prices up to maintain the profit margin. This results in customers in aggregate having to pay more for the product and this additional cost reflects their own credit risk!
So why use BNPL when we already have credit cards? They both have the same main function of delaying payment, right? Well, BNPL firms are targeting to be the more attractive form of credit cards, but that’s not to say that credit cards have lost their place in the payment industry. Let’s make a comparison.
BNPL may seem incredibly attractive now, but as mentioned, they are not without drawbacks.
Late fees for BNPL may be less hurtful to your wallet compared to the late fees and interest charged by credit cards if you don’t pay off your balances at the end of the month, but it may still leave a dent. Most BNPL platforms will automatically deduct the amount you owe when the due date arrives, but if you have insufficient funds in your linked card, then you’re immediately going to owe the late fee. Most BNPL firms will freeze your account if you owe them late fees!
As such, it will be incredibly important to keep track of your account balance, expenditure, and the instalment dates of your various purchases. All of these might be difficult to juggle, but that’s the trade-off of being able to split your purchase payments!
Here are the late payment fees of various BNPL platforms available in Singapore (non-exhaustive)
Note that most BNPL firms will freeze your account if you owe them late fees!
BNPL is a relatively new concept and hence, not all merchants have accepted or partnered up with BNPL firms yet. Some merchants may still require you to pay by the more conventional means, i.e. debit or credit cards, bank transfers, etc. Others may only have partnered with a handful of BNPL firms but not others, meaning that you may have to open an account with more than one BNPL firm if you want to use it regularly.
It’s called “Buy Now, Pay Later” and not “Buy Now, Pay Never”. You will eventually have to pay the entire purchase price of whatever you are buying! The only difference with BNPL is that you’re splitting the price tag up so that you have more time to earn the income to pay it off, so really it’s about convenience more than anything. If affording a certain item was a long shot before you had BNPL, there’s a high chance that you probably still can’t afford it now.
BNPL can be seen as a “debt trap”, where it encourages customers to over-commit with multiple purchases and instalment plans. Evidence for this is mounting across the world:
BNPL may give you a false sense of affordability just because the initial sum you have to pay is a quarter or a fifth of the purchase price. However, you need to remember that the remainder of this purchase price will be hitting your wallet very soon! You need to factor these expenses into your future months’ or weeks’ budget.
Don’t just buy on the fly, you have to be cautious and do the calculations to ensure that your budgeting is still on track. BNPL can help with the flexibility of your expenses, but it does not get rid of them!
While being cautious, here are some other tips for using BNPL schemes!
We have previously compared BNPL and credit cards, but that doesn’t mean they don’t go hand in hand. If you link your rewards credit card to your BNPL account and use it to pay for the instalments, you can earn those rewards, such as cashback and points. Some rewards credit cards also have monthly caps on the rewards earned, but due to BNPL’s instalment nature, you can spread out your spending on the rewards credit card so you decrease the likelihood of exceeding that cap. What a great pairing indeed! Of course, you will be exposed to risks present in both BNPL and credit cards, so you have to pay close attention to your expenditure.
Due to the instalment nature of BNPL, you’ll be able to free up some of your cash flows on a weekly or monthly basis. Don’t let these spare cash sit around and do nothing! Put them into bank accounts and saving plans to earn interest in the short term. But remember, you will still have to pay back every penny (and preferably on time, too!)
As mentioned, if you are to use BNPL, it is critical to be able to keep up with your instalments to ensure that you don’t incur any late fees. Thus, using a budgeting app on your mobile device may be a convenient way to keep track of your expenditure! Alternatively, just note down in your phone calendar when the remaining instalments will be deducted from your bank or card account.
BNPL is a flexible and convenient way to make purchases more “affordable”, but you need to bear in mind the risks of using them. As usual, you have to keep an eye on your expenditure and be mindful as to what you should or should not buy. Taking responsibility for your expenses is always essential!
BNPL. COMPLETED. ✅
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