Buy Now, Pay Later: The Payment Revolution Consumer’s Love

Abstract

Picture being able to get whatever you desire right away, while the worry of payment can be
dealt with later. Sounds quite similar to an EMI plan right, but it’s not. By the end of this piece,
you will understand how the buy now pay later system really works and why you need to know
about it.

What is BNPL?
Buy now, pay later (BNPL) is a form of short-term financing that allows consumers to make
purchases and pay for them gradually, without incurring interest. When you look at traditional
credit cards and personal loans, you’ll find that getting approved for BNPL loans is
comparatively easier for consumers.
For instance, A mental health platform offers 12 therapy sessions for $1,200. Clients can pay
$100 per session over 12 months instead of paying the full amount upfront, encouraging more
people to seek therapy.
Industry names, used and beloved by most of us that employ similar financing methods:
● Apps like After pay, Klarna, and Affirm: These BNPL services are integrated into
brands like H&M, Zara, or Sephora, enabling customers to split payments for clothes,
accessories, or cosmetics.
● Furniture Outlets: IKEA or Pepper fry provides BNPL for furniture purchases, allowing
customers to furnish their homes without upfront payment.
● Streaming Platforms: Services like Netflix or Spotify may collaborate with BNPL
providers to allow annual subscription payments in monthly installments.

Advantages of BNPL

• Ahassle-free method to manage payments for your purchases gradually.
• As noted, buy-now-pay-later financing options enable consumers to spread out payments
  over time without incurring interest fees.
• Getting approved for this type of financing is within reach, even if you’ve faced
  challenges with other loan options because of a low credit score or limited credit history.
  Disadvantages of BNPL
• BNPL loans may not increase your credit card debt, but they certainly contribute to your
  personal loan debt.
• Typically, they won’t impact your credit score unless you miss a payment.
  Settling a BNPL loan typically does not contribute to the development of a positive
  credit history.
• Keeping track of payments can be quite challenging.
• Failure to make timely payments can lead to additional charges and potentially harm your
  credit rating.
• No benefits or incentives gained from purchases.
• What are the stakeholders that are going to be affected by this and why
• Consumers (End Users)
  Impact:
  ● Benefits:
  ○ Access to products/services without upfront payment.
  ○ Flexibility in managing finances.
  ○ Low or zero interest options if payments are made on time.
  ● Risks:
  ○ Overspending due to ease of purchase.
  ○ Debt accumulation if payments are missed.
  Illustration:
  A college student buys a $1,200 laptop using BNPL, paying $100/month for 12 months.
  The laptop helps with studies, but if the student forgets payments, penalties are applied,
  making the total cost $1,400.
  ● Real-Life Example: A survey by Credit Karma revealed that 34% of BNPL users in the
  US missed a payment in 2022, leading to late fees and credit score dips.
• Businesses (Retailers/Service Providers)
  Impact:
  ● Benefits:
  ○ Increased sales and average order value (AOV).
  ○ Attraction of new customers who can’t afford upfront payments.
  ○ Reduced payment default risk as BNPL providers handle collections.
  ● Risks:
  ○ Dependence on BNPL platforms, which take a percentage of each sale.
  ○ Reputational risks if BNPL users face financial difficulties.
  Illustration:
  An e-commerce store selling smartphones sees a 20% increase in sales after integrating
  BNPL. A customer buys a $1,000 phone they wouldn’t have bought otherwise. The
  retailer pays a 3% fee to the BNPL provider but gains a sale.
  ● Real-Life Example: Brands like Sephora and H&M reported higher sales when
  partnering with BNPL platforms like Klarna and Afterpay, as these services encourage
  impulse buying.
• BNPL Providers (Fintech Companies)
  Impact:
  ● Benefits:
  ○ Revenue from merchant fees (2-8% of transaction value).
  ○ Interest and late fees from customers.
  ○ Data collection on consumer spending habits.
  ● Risks:
  ○ Regulatory scrutiny on lending practices.
  ○ Potential defaults by consumers.
  ○ Competition in the BNPL space.
  Illustration:
  A BNPL provider partners with 1,000 merchants and processes $10 million in
  transactions monthly, earning $300,000 in merchant fees. However, if 5% of consumers
  default, the provider incurs a $50,000 loss.
  ● Real-Life Example: After pay, a leading BNPL provider, saw rapid growth but faced
  scrutiny in Australia over concerns about encouraging debt among young users.
• Financial Institutions (Banks and Credit Card Companies)
  Impact:
  ● Benefits:
  ○ Partnerships with BNPL providers.
  ○ Opportunities to offer competitive BNPL products.
  ● Risks:
  ○ Loss of revenue as consumers prefer BNPL over credit cards.
  ○ Pressure to innovate and compete in the BNPL space.
  Illustration:
  A bank notices a 10% decline in credit card usage among millennials. In response, it
  launched its own BNPL service to retain customers.
  ● Real-Life Example: Banks like HSBC and credit card companies like Visa now offer
  BNPL options to compete with fintech firms.
• Regulators and Policymakers
  Impact:
  ● Benefits:
  ○ Opportunity to protect consumers from predatory practices.
  ○ Promote financial literacy and transparency.
  ● Risks:
  ○ Balancing innovation with regulation.
  ○ Difficulty in tracking BNPL’s impact on debt levels.
  Illustration:
  A regulator imposes limits on late fees for BNPL to protect consumers, but BNPL
  providers increase merchant fees to compensate, indirectly affecting retailers.
  ● Real-Life Example: The UK’s Financial Conduct Authority (FCA) announced plans
  to regulate BNPL in 2021 to ensure fair treatment of consumers.
• The Economy
  Impact:
  ● Benefits:
  ○ Stimulates consumer spending.
  ○ Encourages business growth and innovation.
  ● Risks:
  ○ Rising household debt affecting financial stability.
  ○ Overdependence on short-term credit solutions.
  Illustration:
  A country’s retail sector grows by 15% due to BNPL adoption, but household debt
  increases by 10%, leading to potential economic imbalances.
  ● Real-Life Example: In Australia, BNPL has contributed significantly to retail sales
  growth, but a 2022 report highlighted that 15% of BNPL users were cutting back on
  essentials to make payments.
  
  Conclusion
  For companies, the future of BNPL hinges on navigating balanced regulations, fostering
  customer education, and leveraging technological advancements to promote sustainable growth.
  Businesses that integrate BNPL effectively canun lock higher sales, attract broader customer
  bases, and enhance user experiences. However, understanding BNPL dynamics is crucial to
  maximizing these benefits while minimizing risks, such as dependency on providers or
  reputational impacts from consumer financial distress.
  As the BNPL market evolves, companies that proactively adapt to regulatory changes, educate
  customers about responsible usage, and innovate in collaboration with BNPL providers will
  positionthemselvesforlong-termsuccessinthisexpandingfinancialecosystem.

Sushmitaa Patil