Buy now, pay later (BNPL) is a form of short-term financing that allows consumers to pay part of the amount at the point of purchase and the rest in installments. It is especially popular in e-commerce stores. However, the method of payment has been criticized as potentially dangerous for consumers.
What is BNPL?
Buy now, pay later (BNPL) is a form of credit program that allows consumers to distribute their payments in installments. They are often referred to as “installment loans at points of sale” because they allow consumers to shop at the moment but pay for them in the future. Consumers will pay a certain amount at the point of purchase and then pay the remaining amount in installments. These payments are often interest-free and more flexible than traditional credit cards or loans because they do not require approval.
In recent years, they have grown in popularity, largely due to the flexibility they offer consumers. Not only that, but online merchants appreciate having an alternative payment option to expand their potential customer base. Between 2020 and 2021, the number of Americans using BNPL services increased by 85%.
Why has the BNPL become so popular?
The BNPL has many benefits, the biggest of which is probably the flexibility it offers to consumers. Instead of saving on purchases, consumers can purchase the product of their choice at the right time without worrying about paying the full amount. Unlike traditional loans or credit cards, they don’t have to pass a credit check to make a purchase, and they don’t have to pay interest on payments.
ISPs will also benefit from the BNPL as they can offer a wider range of payment options. This means they can reach a new target market that they previously failed to capture. It also means that customers can spend more money. For example, companies using the BNPL Clearpay server reported a 30% increase in the value of their orders.
What are the dangers of BNPL?
Despite the positive aspects of the BNPL, this form of payment has come to the fore as a potentially dangerous lending practice. One of the main reasons for this is the sudden rise of the BNPL – the sector has grown faster than the surrounding constraints, leaving policy-makers to catch up.
One of the dangers of the BNPL and the reason for the great media attention is the target market it is targeting. The main demographic groups of the BNPL are usually the Millennials and Generation Z – the younger generation. The BNPL appeals to these demographic groups because it offers them more flexible payment options and the ability to pay for otherwise unavailable items. In addition, they do not have to undergo rigorous availability checks, as would be the case for a loan or credit card. However, experts argue that this may encourage consumers to spend beyond their means, which means they spend much more money than they would pay for goods in advance.
Another reason why some people are skeptical about the BNPL is the possibility of turning into a form of predatory lending. Although BNPL services offer interest-free payments, they charge any overdue payments, and these fees can be extremely expensive. This means that consumers can quickly find a large amount of money for BNPL suppliers and accumulate debt.
Further criticism was voiced by the trade side of the operation. It has been said that some sellers who offer BNPL services make their products more expensive so that the consumer absorbs the cost of the BNPL service. Again, in this sense, the BNPL can be seen as a way to take advantage of consumers.
Introduction of regulations
The Office of Financial Behavior (FCA) in the UK along with other global regulators discussed as the BNPL can be made safer to avoid predatory lending practices and increasing debt for multiple consumers. Some of the rules they discussed included banning late fees or treating the BNPL more than traditional creditors. Hopefully regulation can be implemented that will make the BNPL market safer and more resilient.