Author: Suraj Sunkara, Graphics: Nina Tagliabue

The BRB Bottomline

Buy Now, Pay Later companies have emerged as a fresh alternative to traditional payments like credit or debit cards. Continue reading to see the unique features Buy Now, Pay Later loans bring to the table and what the hype about them is!

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Over the past year, companies like Klarna, Affirm, and Sezzle have transformed the way we make purchases online. These companies have developed a more flexible payment system called “Buy Now, Pay Later” where individuals have more control over their payment plan than a debit card without the added interest that a credit card might leave you with. This growingly popular system has been adopted by huge companies like Amazon, Target, and Walmart. Throughout this article, we will examine how the “Buy Now, Pay Later” (also referred to as BNPL) model differs from the traditional payment methods and what you should expect from the future of this system.

Debit and Credit Cards

Traditionally, when customers want to buy a product on a website like say, Walmart, they would add items to their cart and then pay for their product up front with a debit card or credit card. When you make a purchase with a debit card, money is pulled directly from your checking account after a processing period. With a credit card, you borrow money from your bank and are billed at the end of the month. You only have to pay back a minimum amount and the remaining balance is rolled over to the next period along with some additional interest.

Buy Now, Pay Later

The overarching concept behind the buy now, pay later model is a point-of-sale loan. You purchase an item and then pay back the cost with a series of payments at a later time. The cost is loaned to you initially and you slowly settle it over a larger period of time. For example, instead of paying $400 upfront when you buy a TV, you would pay 4 installments of $100 every few weeks. Usually when paying with BNPL, you don’t have to worry about paying interest on those separate installments. You just have to pay a down payment (the first installment) and make sure you are paying your other installments on time.

Benefits of Buy Now, Pay Later

The BNPL model is perfect for younger consumers who don’t have credit cards, especially because consumers only need to be 18+ to access this option. That’s why many BNPL companies target this particular audience. 80% of the transactions used to pay off BNPL installments come from debit cards. BNPL is also popular with retailers because it encourages consumers to spend more money. Some companies have reported a 30% increase in average sale value due to implementing BNPL models. The flexibility of the BNPL system also gives access to customers not previously available, bringing more money to companies who use it. As a result, retailers are willing to pay hefty fees to BNPL companies reaching up to 4-5% of the sale value. This is a stark contrast from the 2% fees they usually pay to credit card companies. 

Buy Now, Pay Later vs Credit Cards

In a sense, there are similarities between BNPL models and credit cards. You’re borrowing money upfront and paying back the cost at a later time. At the same time, there are many key differences that differentiate the two. Credit cards give you more freedom in your repayment timeline. Each month, you pay the minimum amount on your card and the rest rolls over with an interest rate. While you can pay in full, you are not required to. This differs from BNPL where your installment payments are pre-determined at the time of payment. If you miss a payment, you will face a punishment that can include anything from a late fee to a negative impact to your credit score. However, you don’t have to worry about accruing any interest or other fees as long as you are meeting these payments.

Credit cards also are more widely usable as not every company has a BNPL payment system set up yet. Fortunately for BNPL fans, however, Square’s (a payments company used by millions of companies) recent acquisition of BNPL company Afterpay could lead to a more widespread usage of BNPL by businesses in the future.  

One significant benefit of BNPL is its friendliness towards younger adults with weaker credit. Point-of-sale loans are significantly easier to get approved and thus more easily accessible to these adults. Furthermore, BNPL companies solely use a soft credit check that doesn’t show up on an individual’s credit report when they are checking their trustworthiness. On the other hand, the hard credit inquiry many other loan providers use can lower your credit score by a few points. 

Risks of Buy Now, Pay Later Payment Systems

The primary risk of BNPL models currently is that government regulation really hasn’t caught up to them yet. BNPL loans simply don’t have the same consumer protections that are given to credit cards like dispute protection. Some BNPL companies don’t even have concrete infrastructure for dealing with merchandise returns. While this should just be a short term problem that is dealt with as BNPL loans are more widely used, it’s still something you should be aware of until new consumer protection policies come out.

Furthermore, BNPL loans could be misused by people with poor financial management. It’s important to keep in mind that BNPL loans are still like any other form of debt in that missing payments could lead to hefty fines. On top of this, BNPL could lead to overspending. As people are paying less upfront, they might be more willing to make multiple larger purchases without taking into account their ability to pay them back over time. Thus, people using BNPL loans should be mindful of making payments on time and budgeting accordingly. Avoiding overspending is incredibly important for people paying using BNPL companies.

Finally, people who take BNPL loans are missing out on the rewards points and cash back many credit cards offer. However, many options are emerging that allow you to take advantage of the benefits of BNPL loans while also continuing to get credit card rewards.

Take-Home Points

Buy Now, Pay Later companies have emerged as a rapidly growing player in the payments industry. Their flexibility and minimal credit requirements/impact on credit make it an extremely appealing option to many individuals with weak credit or without credit cards. Mainstreamification of these payment systems should come with regulations that extend consumer protection policies to BNPL users in the same way credit card users have. If you use BNPL loans, make sure you are aware of your spending habits and have an appropriate plan to pay your installments on time. Carelessly taking BNPL loans without an ability to pay them back could lead to racking up hefty fines and have a negative impact on your credit score. Finally, be sure to check out credit card options that give you the same benefits of BNPL loans while continuing to earn points and cashback on your purchases.