Buy Now, Pay Later (BNPL) is a form of short-term financing which allows consumers to pay a proportion of the amount at the point of purchase and pay the rest in instalments. However, the payment method has received criticism for being potentially unsafe for consumers.
What is BNPL?
Buy Now Pay Later (BNPL) is a form of lending program allowing consumers to split their payments across instalments. They are often referred to as “point of sale instalment loans” as they allow consumers to make purchases in the moment but pay for them at a future date. Consumers will pay a certain amount at the point of purchase then pay off the remaining amount across instalments. These payments are often interest free and are more flexible than traditional credit cards or loans as they do not require approval.
They have grown in popularity in recent years, largely due to the amount of flexibility they offer consumers. Not only that, but online merchants appreciate having an alternative payment option in order to expand their potential customer base. Between 2020 and 2021, there was an 85% increase in the number of Americans using a BNPL service.
Why has BNPL become so popular?
There are many advantages to BNPL, the biggest of which is probably the flexibility it offers consumers. Rather than saving up to make a purchase, consumers can purchase the item of their choice at the time that they want without worrying about paying the full amount. Unlike traditional loans or credit cards, they do not have to undergo credit checks in order to make the purchase, nor do they have to pay interest on their payment instalments.
Online providers also benefit from BNPL as they are able to offer a wider range of payment options. This means that they may be reaching a new target market that they were previously unable to capture. It also means that customers are able to spend more money. For example, companies using BNPL server Clearpay reported a 30% boost in the value of their orders.
What are the dangers of BNPL?
Despite the positive aspects of BNPL, this form of payment has come under the spotlight as a potential unsafe lending practice. One of the main reasons for this is the sudden growth of BNPL – the sector has advanced faster than the surrounding restrictions leaving policy-makers left behind to play catch up.
One of the dangers of BNPL, and the reason for much of its media attention, is the target market it appeals to. The key demographics of BNPL tend to be Millennials and Generation Z – the younger generations. BNPL appeals to these demographics because it offers them more flexible payment options and the ability to pay for otherwise unaffordable items. Additionally, they do not have to undergo the strict affordability checks as they would for a loan or credit card. However, experts argue that it may encourage consumers to spend beyond their means, meaning that they are spending far more money than they would if they were to pay for items up front.
Another reason that some people are sceptical about BNPL is its potential to become a form of predatory lending. Although BNPL services offer interest-free repayments, they charge for any late payments and these fees can be extremely expensive. This means that consumers can quickly find themselves owing a large amount of money to BNPL providers and accumulating debt.
Further criticism has been made about the merchant side of the operation. It has been said that some merchants offering BNPL services make their products more expensive so that the consumer is absorbing the cost of the BNPL service. Again, in this sense BNPL can be seen as a way of taking advantage of consumers.
Introduction of regulation
The Financial Conduct Authority (FCA) in the UK, along with other global regulatory bodies, has been in discussion about how BNPL might be made safer to avoid predatory lending practices and an increase in debt for multiple consumers. Some of the regulation they have discussed has included banning late fees or to treat BNPL more like traditional lenders. The hope is that regulation can be implemented which will make the BNPL market safer and more sustainable.