The Buy-Now-Pay-Later Fever: Advantages and Risks

The payment sector is changing with the continuous advancement of ecommerce, contactless payments, fully digital financial services, and shifting customer values. Specifically, we mean consumer preferences of buy now, pay later (BNPL): an alternative option that offers no credit check and interest-free borrowing.

This new trend promises higher user conversion for business owners. Although it’s easy to be blinded by the selling points, evaluating the option from all angles is crucial. This model may not work for every business, and you may require in-depth analysis and consulting to understand whether it will benefit you. So, we’ve decided to dive deeper and share valuable insights that will help you make the right decision. Are you with us?

Why is BNPL a growing trend that is more likely here to stay?

A BNLP plan lets users receive a product immediately and then pay the bill for it in installments with no interest. It seems like nothing new. However, BNPL brought the concept to the technology era, enabling merchants to offer installment buying of any product, no matter how small it is. Plus, you can do it for both in-store and online purchases.

The use of Pay-in-4 apps exploded during the pandemic. Now almost every second major American retailer offers this service. Since 2018, the number of BNPL consumers in the USA has grown by 300 percent annually. In 2021, it totaled 45 million active users. Meanwhile, this trend accounted for 9 percent of all ecommerce transactions in 2021 and is expected to double by 2026.

Swedish-based company Klarna, valued at $45.6 billion, and Australian firm Afterpay pioneered the BNPL trend. And currently the field is becoming more crowded, drawing the attention of some major corporations. PayPal’s Pay in 4 service saw a 400 percent increase in sales volume using this payment option during the Black Friday season in 2021. High-tech giants Amazon and Apple partnered with the American provider Affirm, another BNPL company. Meanwhile, Square bought Afterpay for $29 billion, once again proving the growing popularity of the BNPL trend.

Businesses globally have been forced to respond to Russia’s invasion of Ukraine, which brought an increase in inflation, a shift in customer sentiment, and a volatile stock market. But despite that, the fintech and payment sector managed to secure investment. Furthermore, experts predict that the buy now pay later option will reach $166 billion by 2023 demonstrating a 28% annual growth rate.

What’s in it for business owners?

BNLP companies state that they can bring higher conversion rates and increased basket sizes because people tend to spend more using this payment option. Moreover, the statistics also prove it, as two in three Americans confess to spending more than they planned due to the availability of the buy now, pay later feature. Consumers can spread expenses out over time, which makes products more affordable and results in more sales. Plus, quick and smooth approval with no credit check promotes impulse buying.

By adopting the buy now pay later business model, you will be featured on the providers’ platforms and exposed to a wider audience new to your brand. For instance, Afterpay advertises its partners in its directory and leads shoppers to brands they have never heard of before.

Other benefits of buy now, pay later offers are that retailers are paid in full at the point of purchase, so there is no need to worry about credit risks.

Potential traps and pitfalls of the buy now, pay later fever

It is important to note that Afterpay’s average fee for merchants was nearly 4 percent in 2021. So, it’s more costly compared with the less than 1 percent average fee for accepting direct payments with conventional card options. You can see that buy now, pay later for businesses comes with greater merchant fees.

Additionally, business owners may be at a higher risk of fraud. BNPL providers often make quick credit decisions, as they give transaction approval while a consumer places a purchase order. So, this reduces the likelihood of detecting cybercriminals or fraudsters during the purchase.

As regulators worldwide raise concerns over customer indebtedness that a pay-in-four model may cause, they can blame retailers as well as service providers for enabling it.

What are the hidden risks for consumers?

While people understand the basics of how this option works, they don’t realize that it’s just another form of credit and are unaware of the financial risks. So, here we provide examples of what can go wrong:

• Insufficient funds charges. Pay-in-four buys imply payment deductions from the person’s credit card. If you have multiple purchases with various payment due dates, these deductions can easily result in your bank charging you an overdraft.
• Debt risks. Seven of 10 BNPL users face interest rate charges. Additionally, 72 percent of those who had fallen behind on payments saw their credit score drop. These numbers show the alarming character of this market that puts people at a greater risk of debt.
• Late fees and interest. Late payments can lead to fees or put you on the list of debtors depending on the provider’s terms. So, consumers might end up paying a fee on a purchase that was supposed to be interest-free.
• Impulse purchases. Easy and interest-free loans tempt people to buy things they don’t need and spend more money than they can afford. Consumers trick themselves into thinking they’re spending less when transactions are divided into four small payments, so it’s easy to lose control. Moreover, some of them may get stuck in a debt cycle.
• Lower user protection. Regulations haven’t reached the BNPL market, especially regarding disputed charges. You can easily get a refund to your card if you use a traditional credit option and return a product. However, when it comes to the use of a pay-in-four option, you will still be responsible for paying installments even for a returned product.

No credit check, but will it impact your credit score?

Most BNPL firms perform no credit check before approving you for their service. This means they’ll search your credit record to decide whether to accept you for purchase without leaving a footprint on your credit file.

However, these companies can refer delayed payments to credit bureaus. So, your credit score is more likely to be affected if you are overdue or miss a payment. In the end, considering the no credit check feature as a part of seamless checkout may be risky. As these schemes become more popular, users are starting to share more stories about their hidden debts.

Furthermore, a no credit check approach makes it tough to handle shoppers’ credit, as companies don’t report customers’ loans to bureaus. That’s why leading credit agencies stated they would start working with BNPL firms to get transactions on consumers’ credit scores.

What do regulators do to mitigate the buy now, pay later risks?

Until recently, the market was largely unregulated. But today, many countries are raising concerns about debt accumulation and putting industry through a thorough analysis and control.

The US main financial regulator initiated an investigation of the business practices and policies of the five major BNLP services. The regulators want to bring greater transparency to their operations so that the market can function properly.

The UK’s advertising regulator banned some of Klarna’s ads that recklessly motivated people to use credit. Additionally, the agency created guidelines demanding all providers to clarify that pay in four is a type of debt.

In Australia, the Reverse Bank conducted a two-year review of the industry and is now cooperating with the Treasury to draw up rules and regulations. The bank concluded that it would be in public interest to remove the industry’s no-surcharge rule that suggests merchants can’t shove surcharges onto shoppers.

While we don’t know what the regulators will decide exactly, we can predict that BNPL providers will have to:

• share reports with the credit agencies
• make contractual forms more transparent and fairer
• add more check points such as anti-fraud and know-your-customer verifications, credit checks, and others

What are BNPL firms doing to eliminate concerns?

In response to the Financial Conduct Authority’s concerns regarding unclear terms and conditions, Clearpay, Openpay, Klarna, and Laybay have decided to adjust their approaches. Moreover, they will refund users who have been charged late fees under specific conditions.

In its submission to Australia’s Department of Treasury, Klarna described a buy now pay later business model as a lower-risk option. Fintech said it had actively and considerably modified its advertising policy and developed a product to promote responsible spending. They would also change the wording to make it clear to shoppers that they offer credit with fees for late payments. Plus, the company stopped approving purchases with no credit check and introduced stricter credit assessments.

What do we think?

If regulators balance the risks of financial hardship and pay in four benefits, it will certainly favor all market participants. What is clear is that the BNPL trend is extending across markets, and businesses need the right technology to power this solution and appropriate regulatory supervision.

Many brands are building in-house solutions to protect their customers and have greater control over the services they deliver. We at TEAM International help businesses that operate in the dynamic world of retail and ecommerce to innovate and thrive despite the crisis.