The popularity of buy now, pay later (BNPL) platforms has exploded in recent years. These platforms created a new credit line at the surface but have revolutionized the retail payment space in reality.
BNPL allows customers to purchase goods, mostly online, with the option of paying later in instalments. Sounds familiar? The platforms claim it is debt financing, not credit, as the amount will be deducted from the bank account every month without any interest.
It brings many benefits to consumers like paying interest-free bills, making large payments in instalments, and even receiving easy credit access, which is sometimes stretched with no credit checks.
“The BNPL trend has exploded among consumers, especially for those who are interested in stretching their buying power and/or personal budgets. BNPL is simply a modern version of layaway with the added bonus of getting the item before all the payments are made to purchase the item,” TreviPay’s CEO, Brandon Spear told Finance Magnates.
The United States, because of the size of its economy, is clearly dominating the BNPL space, and the number of users of these platforms is projected to reach 59.3 million by the end of 2022 from only 1.8 million in 2018. The US-based BNPL platforms handled $55 billion worth of transactions last year.
The global usage of these platforms is likely to increase at a rate of 20.7 percent between 2021 and 2028. The worldwide transaction volume on these platforms is likely to hit $680 billion by 2025, while the expected contribution of the US alone is to touch $100 billion.
Despite US' dominance in absolute numbers, Sweden is leading the ranks when it comes to BNPL’s domestic e-commerce market share with 23 percent, followed by Germany at 19 percent and Norway at 15 percent.
However, retail financing is not new. In fact, it is one of the old financing spaces previously disrupted by credit cards and even some payment giants.
Most of the major BNPL companies are startups like Afterpay, Klarna and Affirm. However, established players like Amazon and PayPal also entered this new industry. Even the payments giant, Visa readied its platform to support BNPL.
However, the question still remains: is it too early to call BNPL a success? Can these BNPL startup giants, mostly bleeding money now, survive the cut-throat competition in the payments industry? Or is it another debt trap?
Another question also arises: how are these companies making money if not charging the users? They charge the merchants, who are willing to pay to close a sale. Merchants usually pay a higher commission to BNPL platforms than their credit card counterparts. In return, they receive benefits like faster payment processing and reduced chargeback, which is still a major issue with credit card payments.
Another Debt Trap?
"Another foundation on which BNPL platforms built their empire was consumer distrust of credit cards. However, many argue that BNPL platforms are only a rebranded version of credit cards."
The interest levied by these platforms can grow exponentially if consumers miss instalment payments or their credit defaults. In other words, Klarna, which is Europe’s largest BNPL platform, racked up $700 million in losses last year, 65 percent of which came from credit defaults.
Access to a credit line is often good, but it can also motivate excessive spending. It could result in serious financial havoc.
“BNPL can be seen as a double edge sword,” said Simone Williams, Media & Public Relations Lead at Better Business Bureau.
“Consumers can get their purchases immediately but also entice them into purchasing items they may not be able to afford. It can be seen as a debt trap if consumers do not pay attention.”
The pandemic even ignited consumers' habit of e-commerce spending. Many spent aggressively on e-commerce platforms through BNPLs without any grip on their personal finance.
“With increasing reports on overspending through the pandemic, taking on more debt should be closely monitored,” Spear added. “Although it seems attractive to pay in interest-free instalments on some of these offers, there are still late fees attached to BNPL services.”
“If a consumer were to compare their fixed BNPL late fee to what could have been the payoff amount on a credit card with a moderate APR, buyer’s remorse would likely be present… not all BNPL products are the same. Some are not interest-free, therefore, the consumer needs to be sure they understand all the associated fees and rates.”
A Broken Model?
Bad debts are not only bad for the consumers, but also for the growth aspects of the BNPL companies. Recently, the Chair of the Australian fintech giant, Zip Co, Diane Smith-Gander pointed out this very aspect of the BNPL business model that is taking bad debts as a part of growth strategy.
“In the industry, there was a bit of a feeling that well these are small amounts of money, so the payback for recovery and collection activity is not the same as if you’re collecting mortgage that’s gone bad,” she said, adding, “I refute all of that because I think we use technology, and you are able to be much clearer about what your book is like.”
However, BNPLs are not restricted to the B2C space anymore. Many such companies have already entered the lucrative B2B space, where payments are much larger, and the risks of bad debts are less.
“B2B merchants are increasingly looking for ways to improve their customers’ experiences, especially in today’s digitally enabled world. To do this, B2B companies are offering BNPL for business solutions that meet the buyers’ need for net terms, get them paid on time, and can be completed with the click of a button online or in stores. B2B buyers have long required trade credit and payment terms for their large enterprise purchases - BNPL for business is the modern-day version of this offering that has recently undergone a facelift to serve today’s digital-first customers,” Spear said.
There is no doubt that BNPL platforms are beneficial. But, they are very risky for retail buyers who do not have knowledge or control over their finances. Consumers should consider payments using these as loans, only with the benefit of no interest if paid on time.
