Buy Now, Pay Later (BNPL): Expanding Financial Inclusion

Today, people live in a subscription economy as a consequence of digitization and shifting consumer preferences. From online video and music streaming to car-sharing services, consumers have become comfortable with the notion of lending/renting out. In the past couple of years, growing digitalization, rising tech adoption by merchants, increasing repeat usage among consumers and an expanding number of fintech players targeting point-of-sale lending have given rise to a popular mode of financing – Buy Now, Pay Later.

New-age Financing - Buy Now, Pay Later — *New-age Financing – Buy Now, Pay Later*

What is Buy Now, Pay Later?

Buy Now, Pay Later (BNPL) is a type of short-term financing option that allows consumers to make purchases, without any interest and pay for them at a future date. Sometimes referred to as “point-of-sale installment loans”, BNPL has become a popular payment option, especially for online retail shopping.

Young consumers find it attractive as Buy Now, Pay Later plans are easier to get approved than traditional credit cards or other lines of credit. Some BNPL options may require consumers to make an upfront payment.

Two-thirds of young adults prefer BNPL, particularly when shopping online, but also when buying in-store.

The popularity of BNPL among GenZ, young Millenials, and new-to-credit borrowers has prompted more retailers to make this financing option a part of their payment process. Several fintech companies offer Buy Now Pay Later solutions on sales made by participating retailers. Popular BNPL apps include Afterpay, Affirm, Bill Me Later/PayPal Credit, FuturePay, and Klarna.

How Does Buy Now, Pay Later Work?

BNPL apps allow consumers to make purchases online and pay them off over time in weekly or monthly installments. The following diagram illustrates how BNPL financing works.

The customer wants to complete an online shopping transaction but is short on funds.
She discovers the online merchant’s BNPL partner’s app at the checkout stage.
After reading the payment terms–monthly payment, zero down payment, no sign-up or late fees–she opts for the BNPL option.
She enters her registered email address and mobile number. Then, she agrees to a soft credit check for the Risk Decisioning process–often done based on Social Media data.
After the soft credit check is complete, the bank verifies her payment method–Direct Debit via debit/credit card or internet banking.
She receives a successful message and can view/download the repayment schedule.
She checks out her shopping cart without the need to pay by cash or card.
The merchant/retailer receives the payment instantly.

Credit Checks and BNPL

Most Buy Now Pay Later companies require a soft credit score to screen for pre-approval financing offers or background checks. However, this does not affect the credit score. However, other companies may conduct a “hard inquiry” or “hard pull”, which can harm the credit score.

A hard pull temporarily knocks some points off the credit score, it often stays on the consumer’s credit report for months, sometimes up to two years. Customers must read the repayment terms to which they are agreeing.

Key Benefits of BNPL

Fast approval. Consumers do not need a good/high credit score to qualify for a BNPL financing option.
Customers have more purchasing power. They can now afford to make purchases that were previously out of their price range.
BNPL can be seamlessly embedded in the online shopping process – a one-click checkout experience.
BNPL arrangements have a fixed payment schedule. But some companies charge next to nothing interest fees for consumers who need an extension on their credit period.
Traditional lending is typically reserved for big-ticket purchases. Consumers opt to use BNPL platforms for smaller, everyday purchases. For example, USD 200 to USD 300 for a 4- to 6-week tenure point-of-sale financing.

Although BNPL arrangements help consumers with low credit scores get instant approval, it adds to their personal debt. Plus, getting and paying BNPL loans off doesn’t help establish and build good credit, either.

Buy Now, Pay Later (BNPL) — Photo by Anete Lusina

BNPL Isn’t All Alluring

BNPL has experienced tremendous growth, especially during the pandemic, but some consumers face buyer’s remorse. Here are a few things to keep in mind before signing up for a Buy Now, Pay Later plan:

Understand the Payment Terms

BNPL companies tend to offer multiple plans and terms for purchase. For example, PayPal’s ‘Pay in 4’ BNPL product offers customers the ability to split the cost into four equal payments due every two weeks.^[2] Some companies ask for an upfront payment. Samsung’s device financing program offers a ‘Buy Now Pay Later’ option for its smartphone users. The plan includes an upfront cost along with a 1 percent processing fee.

Check the Returns Policy Before Buying

It is helpful for consumers to know the returns policy of a product bought using a BNPL arrangement. BNPL policies vary and consumers often need to contact the merchant as well as the loan provider to get a refund. In some scenarios, consumers still have to continue paying for the item until the return is processed.

Ensure the Credit/Debit Card Works With the BNPL Service

Consumers need to connect their debit card, credit card or bank account to the BNPL app or website to complete the transaction. However, not all banks or credit card companies work with a BNPL plan of choice. It’s better to check in advance before shopping.

Check for Late Fees or Penalties

Before choosing a BNPL plan, it’s crucial to go over any additional costs customers can incur. BNPL companies may charge late payment fees. Consumers might want to also check if there are any penalties for missing a payment or failing to pay entirely. Some companies may send agents for debt collection or ban customers from using the BNPL service.

Wrapping Up

Changing consumer needs and retailer awareness has accelerated the adoption of such point-of-sale financing options. According to McKinsey, Buy Now, Pay Later financing “is the only unsecured-lending asset class that has experienced high-double-digit growth through the COVID-19 crisis.^[3]” This indicates the shift in perception of BNPL as a loan instrument to a lifestyle necessity. As internet connectivity and smartphone penetration increase, BNPL will help bring the next billion into the formal financial fold.