Buy Now Pay Later (BNPL) is an online payment method growing in popularity and acceptance.  As a result, both money and investors have moved towards companies big and small to stake their claim in a growing market.  But what is the big deal, and why is everyone excited?

What is Buy Now Pay Later?

BNPL allows you to purchase goods and pay for them in the future.  Approval happens in seconds, and you make a down payment, such as 25% of the total purchase, then pay off the remaining amount in a series of interest-free installments.  BNPL isn’t new; it has been around for more than a century.  The difference now? Financial technology and new apps allow companies to aim BNPL at younger people making impulse purchases of fashion or small electronics.

Young people dislike credit cards and the very high interest charges banks impose when customers don’t pay their balances. Gen Z shoppers prefer the feeling of control they get from the one-off payment schedules of BNPL. Britain’s Financial Conduct Authority cites data showing half of BNPL users are under age 36, and the average spend on a BNPL app was recently reported to be $100.

Who is offering BNPL?

Compared to the UK or Australia, BNPL penetration in the US is much less. Pure play companies include Affirm Holdings (US), Klarna (Sweden), Afterpay (Australia), and Revolut (UK). Established companies are buying or developing their way in: PayPay Holdings bought Paidy (Japan), Apple is teaming up with Goldman Sachs Group, Shopify now offers BNPL, and Visa and Mastercard are developing BNPL technology for their issuer banks. BNPL is now part of the digital wallet.

Why is it becoming popular now? 

The new BNPL companies didn’t make much traction initially. Then in 2019, Walmart switched their credit card servicer, partially over frustration at the slow pace of new credit approvals.  Simultaneously, they partnered with Affirm to offer BNPL in the hopes of finding a more efficient way to extend credit to those same customers and increase sales.

Over the same period, online retailers struggled with how to turn abandoned shopping carts into completed purchases. As BNPL gained traction within Wal-Mart, it was considered a response to the abandoned cart problem. In 2021, Square announced it would acquire Afterpay and Amazon announced it would partner with Affirm to introduce BNPL for the vendors on its platform.

What is different about BNPL?

  • Users don’t pay interest.  Merchants pay a transaction fee to the BNPL company.
  • Users incur fees for missed payments and missing multiple payments could result in an account landing in collections. Initially, providers didn’t report BNPL loans to credit bureaus, but will start to do so in 2022. The change should remind users that these services are loans rather than a simple budgeting tool.
  • Many BNPL vendors conduct soft credit checks, leading to faster approvals than the hard credit checks with credit cards.  Soft credit checks won’t affect your credit score.
  • BNPL companies are not just offering the technology and facilitating the transaction.  They also take on the credit risk of lending to BNPL customers.

Like any method of extending credit, BNPL doesn’t benefit everyone involved.  A 2020 report from the Australian Securities & Investments Commission revealed that 20% of consumers were missing payments, and 15% of consumers had to take out additional loans to cover their BNPL obligations.  The UK reported similar conclusions.

BNPL is here to stay.  Successful long-term investments will reflect attention to both good technology and credit risk minimization as the market expands.