“Buy now, pay later” is a growing sector, becoming increasingly common as a means of payment. However, with its growth comes a lack of standardised guidelines making it a potential danger for consumers.
What is the “buy now, pay later” phenomenon all about?
“Buy now, pay later” (BNPL) can seem like a dream offer – the ability to avoid maxing out your payments in one fell swoop by dividing purchases into fixed monthly payments, without paying any interest rates. But, is this offer too good to be true?
You have probably seen BNPL options popping up in more and more retailers and becoming an increasingly common way to pay; and one of the hottest eCommerce trends of the last year. In fact, global sales for BNPL platforms are already about $100 billion with volumes expected to jump 40% annually by 2023 (data from Bloomberg Intelligence). This is hardly surprising, with many consumers lured in by the promise of delayed payments with zero-percent interest. However, there may be a hidden danger behind these payment methods.
What are the dangers of BNPL?
Buy now, pay later may end up working out as a worse deal for consumers. Although many are seduced by the zero-interest payments (especially compared to credit card APRs), they could actually be more expensive than paying with a traditional credit card. Credit card terms, unlike BNPL, are expressed in a standardised way across different credit card issuers; however, with BNPL, because it is so new and lacks standard regulation, it is more difficult to know what type of deall you are getting yourself into.
How does BNPL work?
Klarna, Afterpay and Affirm are blazing the trail for the BNPL sector; they essentially offer short-term loans which allow you to make payments at regular fixed intervals. However, if the consumer is not paying interest, how do these payment platforms make their money? These companies make the majority of their profit by charging fees to retailers; the fee is so that the retailers can offer the BNPL service to clients. This can be appealing for merchants as they know that shoppers will end up spending more money if they do not have to provide the funds up front.
However, there is a lot of variation within the different providers and all of them have different ways of working. For example, some work more like traditional credit cards, allowing long-term financing and charging interest; others, on the other hand, allow consumers to make interest-free payments during a fixed short period of time.
Due to the different options available, consumers can easily get confused. It may be possible that a consumer starts with a 0% interest option but after some time gets offered a loan with interest.
These rates could end up being equal, if not even higher, than they would have paid with a traditional credit card. Even within the BNPL providers charging interest, the interest rate varies wildly between purchases from different merchants making it difficult to keep track of what you are paying.
To increase transparency in the industry, the FCA has called for a number of changes to help customers.
Is BNPL a good option?
BNPL can help segment big payments into more manageable payments over a longer period of time. However, they have to be approached with caution. Often, merchants will charge consumers more to pay for the item in intervals meaning that, even though the payments are staggered, you end up paying more than you would have done if you had covered the cost outright.
Additionally, when entering BNPL agreements with interest, you must be careful to note what the interest rate is and whether or not it is a better deal than a traditional credit card would be. Finally, BNPL has the potential to damage your credit score if not used correctly.