Buy now, pay later (BNPL) is a type of point-of-sale installment loan that partners with retailers to allow consumers to pay for their purchases in multiple equal payments. One could consider it the “layaway of the digital age,” except unlike with layaway, the consumer does not have to pay in full before taking their purchase home, using the service, obtaining the tickets to an event or destination, etc., which is a huge draw to using BNPL as a non-cash payment method.
When online shopping, if a retailer has a partnership with a BNPL platform, the customer can choose it as their payment method when placing their order at checkout. When a customer chooses the BNPL provider as their payment method, the merchant site will direct the user to the BNPL site where they [the user] will be presented with the terms of their installment loan – how many payments they will have, the amount of each payment, and the dates that each payment will be due – the customer will then agree to these terms and be sent back to the merchant site to complete their transaction, having confirmed BNPL as their method of payment.
BNPL companies exploded during the pandemic when many were struggling financially and doing more online shopping, and they have continued to grow in popularity among practically all industries. Here, I will discuss the differences between several popular BNPL providers and the pros and cons of using BNPL as your payment method.
What Are Some Buy Now, Pay Later Companies? Which one is best for me?
When deciding whether to use a BNPL service for a purchase, it is essential to read the fine print. Here are critical facts to know about some of the most popular BNPL service platforms:
Afterpay: Afterpay was founded in Australia in 2014 but was acquired by fintech Square earlier this year. It only offers one loan option, which is a zero-interest loan paid in four equal installments over six weeks. It has an interest rate of 0% but does charge an $8 fee, or fee of 25% of the transaction (whichever is less) for late payments. Afterpay does not perform a hard credit check on users, but it can still affect credit if users have a credit card as the form of payment connected to their Afterpay account or if they fail to pay back their loans. Since Square purchased Afterpay, customers can get an Afterpay card to use with participating retailers that operate with Square, which lets customers use Afterpay for in-store purchases. Afterpay is offered at thousands of merchants – notable names include Nordstrom, Bed, Bath & Beyond, and Nike.
Affirm: Affirm offers the same interest-free, 4-equal-biweekly payment plan as Afterpay, but it also offers a monthly payment plan for bigger ticket purchases. The 4-payment plan is interest-free, but its monthly payment plans – it has both a 6-month plan and a 12-month plan – require a credit check, and your rate can be anywhere from 0–36% APR, based on your credit. Affirm says on its website that it sometimes reports users’ payment history to Experian, and it “may report loans with delinquent payments.” Affirm is offered at hundreds of businesses, including Expedia, Neiman Marcus, and Lowe’s.
Klarna: Klarna offers three payment plan options: an interest-free 4-equal-biweekly payment plan, an interest-free 30-day payment plan, and a monthly payment plan that allows 6 to 24 months to pay the loan off. The APR when using the monthly payment plan is between 0-29.99%. If you use Klarna’s 4-equal-biweekly payment plan or interest-free 30-day payment plan, it does not check your credit; however, Klarna does perform a hard credit check on users who use its monthly financing, as those loans are issued through WebBank. Some of Klarna’s merchant partners are Saks Fifth Avenue, Wayfair, and Lululemon.
PayPal’s Pay in 4: PayPal’s Pay in 4, like the others listed, offers an interest-free 4-equal-biweekly-payment plan. PayPal does not disclose what kind of late fees it charges for those who miss a Pay in 4 payment, as they vary from state to state, and according to its website, it only performs soft credit checks that do not affect users’ credit scores. Pay in 4 is not currently available for residents of Missouri, New Mexico, North Dakota, South Dakota, Wisconsin, or any US Territories. Notable merchant partners include Best Buy, Home Depot, and Target.
So, if there’s usually no interest being charged for BNPL purchases, how do these companies make any money?
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BNPL companies make their money by charging the merchants they partner with a fee ranging from two to eight percent of every purchase completed through their service. Although this is certainly expensive for merchants, it has proven to be a worthy investment. According to a survey by Lending Tree, nearly 70% of BNPL users admit to spending more on purchases when BNPL is an option than they do if they have to pay for everything upfront, bringing up the average value per order and resulting in higher profits for participating merchants.
Pros & Cons of Using BNPL
BNPL allows those without a lot of supplemental income to make larger or more expensive purchases without taking the hit for them all at once. For example, one time in college, at a point where I had extremely minimal supplemental income, I needed (wanted?) new shoes to wear to a wedding, but I also needed to buy my friend a wedding gift, and my rent was about due. I used Afterpay for the shoe purchase because it allowed me to not take as big of a hit to my bank account at a time when I had more expenses than usual occur all at once so that I could feel more financially secure as I awaited my next paycheck.
But, the reality was, even though I felt more financially secure, I wasn’t technically in any less debt than I would have been had I just bought the shoes outright. Using Afterpay, however, made it Future Me’s problem and let me have everything I needed and wanted at that moment and avoid racking up my credit card balance. And, I didn’t have to pay interest, so I’d say Afterpay worked out for me well in this instance.
This illusion of feeling more financially secure than one is that often comes with using BNPL services is where they garner a lot of criticism, however. As J.D. Power’s recent Banking and Payments Intelligence Report stated, “The simplicity of the interface combined with the immediate gratification these digital payment solutions provide is creating a potentially dangerous illusion that many purchases are either without cost or something to worry about later.” Some have even gone as far as to label BNPL services as exploitative of young and lower-income people.
Consumer advocate groups and regulators have also brought forth concerns about the ramifications of BNPL existing outside of the normal credit-reporting system. For instance, since BNPL companies operate separately from one another, consumers can have multiple loans going through different BNPL companies all at once, and no system must oversee these loans or approve them before they are issued. Also because they are not associated with credit-reporting agencies, BNPL services don’t contribute to elevating users’ credit scores, so many economists worry about the long-term effects of using BNPL services instead of credit cards.
The Congressional House Financial Services Committee held a hearing last fall, “Buy Now, Pay More Later? Investigating Risks and Benefits of BNPL and Other Emerging Fintech Cash Flow Products,” discussing the considerations for these products regarding “consumer data, the exploitation around spending patterns, the application of lending laws, and the potential for unsustainable levels of consumer debt.” Lauren Saunders, Associate Director of the National Consumer Law Center, said in the hearing that even for products “clothed in shiny fintech garb,” more consumer protection measures need to be in place for BNPL products and asserted that many of their “abusive profit models may be built on late fees from struggling consumers.”
However, some speakers at the hearing had many positive things to say about the BNPL model and the benefits of innovative new Fintech products in general, crediting them for increasing inclusion in the financial services industry for underserved and low/no credit individuals.
According to Kristen E. Broady, a Metropolitan Policy Program Fellow at the Brookings Institution, through some of these new fintech innovations such as BNPL, “Financially vulnerable populations experience greater income and expense volatility.” Penny Lee, chief executive officer of the Financial Technology Association (FTA), mimicked these sentiments in her statement, pointing out the shift in how younger people are preferring to spend their money and how these products have shown positive contrast to “revolving credit and high-interest products that may take years to pay down, blur the true cost of a purchase, and oftentimes keep consumers in vicious debt due to continuous interest charges and rollovers.”
Looking Ahead in the BNPL Landscape
Currently, the Consumer Financial Protective Bureau has an open inquiry on the BNPL marketplace, aiming to monitor the risk of consumers overextending themselves and the security of user data.
Fintech enthusiasts should also keep a close watch on Apple’s newly unveiled BNPL system, Apple Pay Later. Apple is planning to make this service available at both online and retail stores – if you can use Apple Pay for it, you can use Apple Pay Later for it. The perk about Apple Pay Later is that it requires no integration for merchants.
Whatever your stance is on BNPL, the statistics are saying that it’s making its mark. As of 2022, 43% of Americans have reported using a BNPL service for at least one purchase. Forty percent of people have also reported being late on one of their BNPL payments, though, which certainly provides validation for some of the concerns surrounding the products.
Whether BNPL is a fad or here to stay, fintech and credit companies should certainly take note of the hyper-personalized and flexible business models that are making customers think twice about using their credit cards for bigger-ticket purchases.