Have you ever been in a situation where you felt swamped by the overload of your loans? But at the same time, you still had creditworthiness and that strong desire and need to buy something exceptional?
The model “Buy Now Pay Later” (BNPL) is exactly what you search for. It is a new way of payment that gains popularity in the fast-paced world we live in nowadays. This mean of payment allows rescheduling of the payment in few instalments, without any additional costs such as commissions, fees, interest rate or other taxes.
As an example, for such transaction let’s examine the situation where customers want to buy goods for EUR 400, and they are given the possibility to choose the model BNPL. Considering that, customers pay EUR 100 at the moment of purchase and the remaining 300 EUR in a period of 1-3 months.
Currently the method is mostly used by on-line stores, however that doesn’t mean that the off-line merchants could not implement it.
Millions of buyers now employ BNPL service to partially finance their purchases by using different options. This type of financing is called POS loans (point-of-sales loans) and represents 2,1 % from the global e-commerce transaction volume in 2020 – around USD 100bln (according to Worldpay – a payment processing firm)
The most recognized companies in this type of service are – Klarna, Affirm and Afterpay.
As a prosperous business with a huge potential, many big companies are entering the market as well:
- PayPal has launched its own product and is challenging the Asian market by acquiring Japanese firm Paidy (in USD 2,7bln deal).
- Amazon and Apple are partnering with Affirm (US based company).
- Square (American FinTech leading company) is about to buy AfterPay (Australian firm).
- Chase and American Express has started offering BNPL solutions.
The concept may seem quite up to date but it isn’t entirely new – instalment plans have been around for many years. Good examples for such are instalment schemes incorporated in credit cards. Cardholders have the possibility to choose 3,6,9,12 months with IR or with 0% IR usually on online/mobile banking app or by Contact center calls. Moreover, some banks offer these schemes on their physical POS devices. In U.S. this form of old schemes is known as “layaway”.
So, how does this work in practice?
Buy now Pay later are not exactly the same. Each company has its own conditions but general the service looks like as it follows:
- Buyer makes a purchase at a participating retailer and choose the buy now pay later at check out.
- After instant (after some seconds) approval the buyer make a down payment of 25 % of total purchase amount.
- The remaining due amount is paid in several interest-free instalments for three or four months – this repayment could be done with bank transfer, by debiting buyer’s current account, debit card or credit card automatically.
The research among customers shows that the model BNPL makes the purchase more appealing due to two significant reasons – on the one hand, the possibility for rescheduling of the payment in time and on the other hand, the flexibility the goods to be tested before being fully paid. Another obvious advantage for the buyer is the possibility to purchase more expensive goods in some short-term plans even with 0% IR.
This service leads to higher purchase amounts and more closed deals which motivates the retailer to agree to the condition of the BNPL companies to deduct some amounts from the paid by customers instalments. Moreover, BNPL companies generate income on late payment fees and interest on long-term repayment plans
BNBL companies insist that their service is a much better alternative to standard purchase with credit cards. There are other opinions that by this people are spending more than they can afford and risk to get into uncontrolled and enormous debt.
What factors explain the popularity of the service lately?
As we live in a COVID-19 pandemic plenty of traditional off-line (brick-and-mortal) retailers were forced to introduce on-line solutions, thus have the chance to introduce the existing or newly appeared functionalities, including BNPL.
According to the report of Worldpay, expectations for BNPL transaction share is to double for the next 3 years and become around 4, 2% from total e-commerce turn-over. As shoppers prefer a BNPL fintech solutions the credit cards providers are taking steps to ensure that they are not missing the opportunity. Visa – the largest card payment company is eager to work with fintech companies as well (signed a global brand deal with Klarna).
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