What Is BNPL? Is It Time to Say Goodbye to Credit Cards?

Move aside credit cards, there’s a new way to pay for goods now!

• BNPL schemes help to delay your purchase payments, plus split them up into instalments payable in the future.
• BNPL offers low to no interest rates for the splitting of payment into instalments. However, there will be penalty rates imposed if you fail to pay each instalment on time.
• BNPL may give a false sense of affordability, so it is very important to keep track of your spending and payment instalments.

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's gaining 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. BNPL currently reflects a small piece of overall spending on payment cards (e.g. credit cards and debit cards), but it’s unlikely to stay this way. Estimates predict it to grow by 10 to 15 times its current volume by 2025, so it’s best to know the ins and outs of BNPL!

How Does BNPL Work?

BNPL has two main goals. First, 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. 

BNPL can work one of two ways: Split instalments or Point-of-Sale Financing.

• Split instalments involve splitting the purchase price into several equal payments (typically 3 or 4 payments, made once or twice a month). For most BNPL firms, the instalments are automatically deducted from your linked credit or debit card. Those unable to pay on time will face late fees and possibly the locking of your BNPL account. Split instalments are the more popular adopted method of BNPL. 
• Point-of-Sale Financing (POS financing) works similarly to credit cards. You borrow the initial purchase price (minus the first instalment, if paid immediately) from your BNPL firm to pay for the purchase upfront. Traditional interest is then incurred. This method is less popular amongst consumers due to it being more expensive, so is less adopted by BNPL firms.

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 go 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 merchants don’t partner with every BNPL firm. Competition amongst BNPL firms is booming; as such, you can expect to see more diverse offerings and features from these BNPL firms in the coming years. 

How Does BNPL Affect Merchants?

Partnering with a BNPL firm means that the merchant will pay hefty commissions to the BNPL firm in exchange for the new payment scheme for their products. This scheme typically leads to increased sales volume, which benefits 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 BNPL instalment sales, the BNPL firm pays the full purchase price, minus the hefty commissions (typically up to 6%) to the merchant. 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!

Paying Using BNPL vs Credit Cards

So why use BNPL when we already have credit cards? They both have the same main function of delaying payment, right? Well, BNPL firms aim to be a more attractive form of consumer credit, but that’s not to say that credit cards have lost their place in the payment industry. Let’s make a comparison.

WHAT IS BNPL? COMPLETED. ✅

Sources:

1. https://qz.com/1982104/klarna-afterpay-affirm-buy-now-pay-later-model-is-spreading/
2. https://www.cbinsights.com/research/report/buy-now-pay-later-outlook/
3. https://www.timesnownews.com/business-economy/industry/article/buy-now-pay-later-options-vs-credit-cards-everything-you-need-to-know/605250
4. https://www.businesstimes.com.sg/brunch/pay-later-not-never-what-buy-now-pay-later-spells-for-consumer-debt-and-the-easy-credit
5. https://www.consumerreports.org/shopping-retail/hidden-risks-of-buy-now-pay-later-plans/
6. https://www.fool.com/the-ascent/credit-cards/articles/3-biggest-dangers-buy-now-pay-later-services/
7. https://www.choice.com.au/shopping/online-shopping/buying-online/articles/what-is-afterpay
   
8. Cover photo from picjumbo