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Buying now, paying later is having a moment.
Millions of buyers now use a buy now, pay later, or BNPL, service to finance their purchases. And the options are more varied than ever – Klarna, Affirm, and Afterpay are just a few of the many providers in the space.
Meanwhile, big business is getting on the bandwagon, with PayPal launching its own product, with Amazon and Apple teaming up with Affirm and Square agreeing to buy Afterpay in a $ 29 billion deal.
BNPL companies present their service as a better alternative to credit cards. But critics fear that many people are spending more than they can afford, and some may not even realize they are going into debt.
So, what is buy now, pay later? And why is it suddenly booming?
What is BNPL?
BNPL plans, also known as point-of-sale loans, allow buyers to pay for their items over a period of installments.
The concept is not new. Installment plans have been around for years, known as “layaway” in the United States or “lay-by” in Australia. These agreements allow people to spread the cost of the items over a certain period of time.
BNPL is similar in that consumers get the product up front and pay for it in incremental amounts, often without interest.
Buyers can choose to use BNPL service while checking out online with just a few clicks. They then usually pay the first installment and are billed the remaining amount for a period of three to four months.
BNPL providers often add a payment button to a retailer’s website and then take a merchant’s share with each transaction. Experts say retailers have an incentive to accept this as it often leads to higher average order value and better conversion rates.
Some BNPL companies also generate income from late fees and interest on longer term payment plans.
The advantage for buyers is that they can purchase an item for more than what they could normally afford at one time – for example, a $ 300 jacket – and spread the cost of their purchase over monthly installments.
Why is it so popular?
One word: coronavirus.
The pandemic has forced many physical retailers to shut down temporarily and has seen consumers spending much more time at home.
This has accelerated the growth of online shopping. According to a report by Worldpay, the payment processor owned by FIS, global e-commerce transactions totaled $ 4.6 trillion last year, up 19% from 2019.
BNPL accounted for 2.1% – or about $ 97 billion – of that amount. This figure is expected to double to 4.2% by 2024, according to Worldpay.
While BNPL plans had already gained in popularity before the pandemic, a shift in consumer spending habits and the growing adoption of e-commerce have given the market a significant boost.
This has been a boon for a number of companies in the space, with Klarna hitting a valuation of $ 46 billion in a recent private fundraiser, PayPal acquiring Japanese company Paidy for $ 2.7 billion and Square seizing Afterpay.
What are the risks ?
One of the main criticisms of BNPL is that it could cause buyers to spend more than they can afford. Later payment plans are especially popular with Millennials and Gen Z buyers.
Which ?, a consumer advocacy group in the UK, said it had conducted a survey which found that nearly a quarter of BNPL users were spending more than they initially expected because the service was available.
There are also fears about how easily people can get into debt, sometimes without even realizing it, as there are no serious credit checks.
The industry has been likened to controversial payday loans that allow short-term borrowing, often at high interest rates. While BNPL is generally interest-free, some providers charge high late fees.
BNPL providers say they have safeguards in place to ensure users don’t overspend. Klarna, for example, sets spending limits on a case-by-case basis.
“For each transaction, we take a new position and look at how consumers use this product,” Sebastian Siemiatkowski, CEO of Klarna, told CNBC.
“If they use it in a positive way, we can expand their ability to use it. If not, we will restrict their ability to use it or stop their ability to use it altogether.”
But critics argue that BNPL needs regulations to sufficiently protect consumers. The UK government is looking to curb the industry with a range of proposals, including affordability checks for customers. A consultation on the rules is expected to be released in October.
For their part, Klarna and Clearpay – the UK arm of Afterpay – say they are in favor of the move towards regulation.