A Comprehensive Research on Buy Now, Pay Later (BNPL)
What can you expect after reading this story on Buy now, pay later (BNPL)?
If you have read my previous story on payment-ecosystem-demystified then I assume you already have basic understanding of Payment ecosystem and if you are curious to take your learning further in payments world then this story is for you!
Through this story I attempt to clarify frequently asked questions on Buy now, pay later (BNPL) like:
✓ What problem does it solve?
✓ How is the user experience?
✓ What is alternative credit, Installments mean?
✓ Who will get benefited with this?
✓ Challenges and opportunities
so lets begin!
Before you try to understand BNPL, understand the concept of Credit and Installments
Most people still think of credit as an agreement to buy something or get a service with the promise to pay for it later. This is what is referred to as a purchase on credit.
Credit cards are the most common way to buy something on credit right now. This adds a middleman to the credit agreement. The bank that gave the card to the buyer pays the merchant in full and gives the buyer credit, so the buyer can pay back the bank over time and pay interest. Source
Is credit equivalent to a loan?
There are a couple different forms of credit that consumers access most often, revolving credit and installment loans. Credit cards are often associated with point-of-sale purchases, while installment credit is associated with larger purchases.
The concept of installments is simple: the consumer makes a down payment and pays back the remaining amount at regular intervals.
Examples of installment financing platforms are Klarna, Affirm, AfterPay and Splitit
Revolving credit, or revolving debt, allows consumers to repeatedly borrow a certain amount and repay a portion of the balance due in regular installments. With revolving credit, there is a set limit to how much consumers can borrow. Two common forms of revolving credit are credit cards and lines of credit (LOC)
An LOC can be secured (by collateral) or unsecured, with unsecured LOCs typically subject to higher interest rates.
Credit cards are technically unsecured LOCs, with the credit limit — how much you can charge on the card — representing its parameters. But you do not pledge any assets when you open the card account. If you start missing payments, there’s nothing that the credit card issuer can seize in compensation.Source
Non-revolving LOCs have the same features as revolving credit (or a revolving LOC). A credit limit is established, funds can be used for a variety of purposes, interest is charged normally, and payments may be made at any time. There is one major exception: The pool of available credit does not replenish after payments are made. Once you pay off the LOC in full, the account is closed and cannot be used again.
So when there is already Credit products available, why do we have BNPL?
BNPL is the current nomenclature of consumer or point-of-sale financing, a service existing for more than 60 years and previously known as “layaway.” In its simplest form, the concept allows consumers to pay for a single purchase over multiple transactions, typically spread over several weeks or months. BNPL has grown in popularity as an alternative to credit, especially for underbanked consumers. Source
BNPL Solutions vs. Credit Cards
Who benefits from BNPL services?
Consumers benefits
According to Juniper Research, BNPL payments are expected to account for nearly a quarter of all global ecommerce transactions by 2026, up from just 9% in 2021. The payment type skews younger, with eMarketer forecasting 44% of Gen Z and 37% of millennials making a BNPL payment in 2022, compared to 23% of Gen X and 9.4% of baby boomers. It’s a payment type that attracts all audiences, particularly Gen Z and millennials.
Merchants benefits
Customer and merchant networks BNPL model
Figure A1 shows that in a number of BNPL arrangements (Source)
(1) the BNPL provider pays the merchant the full purchase price at the time of purchase (allowing for processing time)
(2) less BNPL merchant fees
(3) The customer pays back the BNPL provider in a series of zero-interest instalments, with the first repayment typically made at the time of purchase. Customer repayments are typically made from a linked debit or credit card, although some providers also accept other payment methods such as direct debit from a bank account and/or BPAY .
The consumer’s bank and the BNPL provider’s acquirer clear and settle the obligation with each other and when a credit or debit card is used, the BNPL provider’s acquirer pays an interchange fee to the card issuer.
(4) While many BNPL services are free for lower-value purchases when consumers make payments on time, there may be fees for late payments, as well as direct fees such as establishment or monthly fees for products that facilitate higher-value purchases
How does BNPL work?
Consider a buyer who intended to purchase $100 worth of some product online but was given the option to instead pay $25 every two weeks for eight weeks. That consumer may instead purchase more goods.
BNPL User Experience
BNPL distribution models — Source
There are four key distribution models:
- via merchant: in this model, the BNPL provider is integrated directly at a merchant’s check out (Klarna as a payment method on Adidas’ site) or as part of a platform the merchant uses (Affirm as a payment method on a Shopify seller’s site).
- via network: in this scenario, a merchant integrates with a network like Mastercard/Vyze or Visa/Chargeafter, which, in turn, has a network of lenders; financing type and fee structure will vary based on the type of lender for a given transaction.
- via existing bank card (credit card): recognizing the competitive threat from evolving “split pay” and specialty POS lending options, existing credit card companies like Chase and American Express introduced the ability to ‘convert’ credit card charges over a certain amount into an installment-type loan.
- via white label: basically, the BNPL version of the classic store brand credit card.
News around BNPL
Smartpay Uses Open Banking to Streamline BNPL in Japan
Worldline and Splitit have signed a partnership agreement to deliver card-based BNPL payments.
Sezzle Offers College Kids BNPL for Buying Textbooks
How do we see this in Future?
Challenges
The arrangements for BNPL have become increasingly popular with both merchants and customers. Such widespread adoption has led to increasing regulatory scrutiny although in some jurisdictions self-regulation through industry codes have been the preferred route. Regulators are concerned that consumers may not fully understand the implications of entering into a BNPL scheme. Source
Regulation
There’s no existing federal-level regulatory framework specifically designed for BNPL, which industry insiders say has created a perception that the industry isn’t regulated at all. But BNPL is already covered by state and federal lending laws, and has been throughout its existence. Source
BNPL Shopping Tips for Consumers — Source
The first questions you need to ask yourself are:
1) Is the purchase necessary/one you won’t regret?
2) Is buy now, pay later the only way you can afford it?
3) Are you certain that you can and will make the payments on time?
If it’s a necessary purchase — say a new mattress or a new computer — and you know that you will be able to make the monthly payments (make sure you know what they are before you buy the item) then a buy now, pay later loan might be a good option for you.
One of the primary financial risks of BNPL is that it may encourage you to spend significantly more than you normally would. Almost 70% of consumers that have used BNPL services admit to overspending when using them.
BNPL can possibly make credit standard in a credit business sector like India. Here are the experts’ opinions on it:
“I think in the future, it is going to expand the formal credit base. However, what is required is the right visibility and appropriate education for the consumer to appreciate the impact of this facility. Most consumers still don’t understand that BNPL is a line of credit. This education has to be more academic and knowledge-centric rather than technology-driven. The facility has an incredible scope to bring in more people to the formal credit system.” ~ Kunal Jhunjhunwala, founder & MD, Airpay. — Source
