Buy Now, Pay Later (BNPL) is a payment scheme that allows consumers the ability to make a purchase without the responsibility of paying the full cost all at once. Instead, consumers can spread out payments over a predetermined schedule. An upfront payment can be made at the point of sale, though it’s not always required.
BNPL has gained in popularity in recent years. This accelerated during the pandemic, which saw massive surges in eCommerce and contactless payment options hit the market.
Over the last eighteen months, the public’s expectations shifted in favor of ease-of-use and convenience in a remote situation. Many other consumers experienced financial uncertainties. In this context, it’s no surprise that the idea of not being charged upfront would be an appealing option.
Despite its significant growth, though, BNPL is not a new concept in the world of lending.
How Does BNPL Benefit the Industry?
Buy now, pay later is a point-of-sale microlending payment solution that merchants can offer to consumers at checkout. Customers are given the option to finance items by no payment at all, or by starting small and paying the rest through recurring installments, such as weekly, biweekly, or monthly.
One of the key differences between Buy Now, Pay Later and conventional credit or installment lending is that BNPL is more concerned with closing sales as opposed to ensuring the customer repays their loan. It also requires less comprehensive credit checks than most forms of retail financing. This makes it a more appealing option for those who have low or limited credit, such as young adults, or those who are ineligible for traditional lending options.
An obvious benefit to BNPL is that consumers can take home items that they didn’t pay for up front. Oftentimes, this means that many consumers might spend more than they could with alternative checkout methods. Additional advantages include a fixed payment schedule, simplified checkout process, fast approval, and zero-interest.
In most cases, no interest is accrued on BNPL payments. As long as the initial price is repaid within the designated time period, the consumer won’t have to deal with interest or late fees. There are also incentives for merchants to invest in BNPL, including increased conversion rates, staying competitive and relevant, and attracting new customers.
The Hidden Risks of BNPL
All of this sounds good on paper, but are there any downsides?
Unfortunately, one of the benefits of the buy now, pay later scheme also functions as a risk factor. Due to the nature of BNPL having less strict credit checks and requirements, consumers can fall into debt by continuing to purchase items that they can’t currently afford.
It’s also commonly assumed that BNPL is a cheaper option than credit cards. While this might appear to be true from the onset, if the consumer makes a habit of missing payments, they might rack up penalty fees, which will then impact their credit score.
In the event the consumer pays off their whole purchase within the allotted time frame, they have nothing to fear from late fees. It’s more likely, though, that BNPL might lure consumers into a false sense of security and prompt them to purchase bigger ticket items that are outside their price range. A missed payment can easily turn into late fees, deferred interest, and other penalties.
Where Do Banks Fit into the Equation?
Many financial institutions are choosing to establish their own buy now, pay later programs. They’re doing this for a number of reasons. For one, they already have a wide customer base and can leverage long-standing relationships with cardholders.
Banks are in a unique position to present BNPL options in a way that aligns perfectly with each client’s personal financial journey. Banks also have access to existing merchant relationships behind the scenes, and can work together to find a solution that benefits everyone involved.
When it comes to taking ownership of their own BNPL programs, one of the biggest roadblocks that banks face is a lack of infrastructure and regulation. The more popular BNPL becomes, the more banks will need to ensure that the necessary regulations are put in place to address the pitfalls of consumers spending more than they can afford.
If mobile wallets, frictionless payments, and contactless experiences are any indication, then BNPL commerce seems to be here to stay. It’s vital that we take the opportunity now to craft reasonable regulations to govern this new frontier in payments. These rules must be widespread enough to address consumer protection, return policies, and disclosures, while still providing a smooth and seamless experience to consumers.
