An introduction to BNPL
What is BNPL?
As the name implies, BNPL, which stands for Buy Now, Pay Later, is a system that allows people to make purchases and pay for them at a future date. The payments are usually stretched over a certain period, often interest-free. However, customers are normally charged late-payment fees. Basically, BNPL is a form of debt, most of the time in the form of POS instalment loans, that stretches one's obligation to pay.
Who started BNPL?
The progenitor to today's BNPL is the "instalment plan," known as "layaway" in the US, or "lay-by" in Australia and some other English-speaking countries. The practice to pay off purchases weekly or monthly can be traced back as far as the 1840s when the makers of furniture, pianos, and farm equipment competed and tried to make their products seem more affordable than those of their competitors. It became even more popular with the arrival of cars. However, credit cards later became the more preferred way of spreading payments.
Is BNPL a type of loan?
Yes, BNPL is a type of loan that allows consumers to pay for a purchase in separate instalments over a certain period.
Who uses BNPL?
One in three consumers in the United Kingdom said they used BNPL services more often than before in 2020 during the pandemic, according to a survey by Statista. Meanwhile, a survey conducted by The Ascent in March 2021 showed that 55.8 percent of respondents used a buy now, pay later service, compared with 37.65 percent in a survey conducted in July 2020. The growth was mostly among people in the 18 to 24 and 55+ age groups at 62 percent and 98 percent, respectively.
How does a BNPL provider make money?
Since most BNPL companies offer plans that do not include interest and assuming only a fraction of BNPL users is unfortunate enough to be charged a late-payment fee, how do BNPL companies make a profit? Easy. BNPL providers earn money by taking a cut from the price of the products they help merchants to sell. The amount merchants pay in BNPL charges ranges from 2 percent to 8 percent of the purchase price, with some providers charging a flat fee per transaction.
Who takes the BNPL credit risk?
Due to its nature as an unsecured credit product, BNPL providers must mitigate the credit risks as prudent as possible by leveraging tools that can provide deep insights. In addition, some providers might charge late payment fees and additional fees such as extra charges for rescheduled payments
BNPL vs Alternative Solutions
Since BNPL is now a global phenomenon, let's see how it fares against its competitors.
BNPL vs credit cards
Credit card companies often charge fees that BNPL providers do not, including an annual fee and foreign transaction fees. While BNPL can be used to purchase goods at retailers, credit cards can also be used to buy gasoline, make utility bill payments, and cover other expenses that BNPL does not allow. BNPL credit limits are also often much lower than those of credit cards. However, BNPL can be approved without the user being subjected to a hard credit check, which, depending on the situation, can lower a user's credit score.
BNPL vs instalments
BNPL is the modern version of instalment loans. BNPL services are equipped with appealing user interfaces and responsive, informative, and easy-to-use apps, granting users a solution for their purchases in an instant. This gives BNPL a wider reach for the tech-savvy generation.
BNPL vs POS financing
Point of sale (POS) lending or POS financing is a lending option that users tend to choose when paying for big-ticket items, such as furniture, vehicles, home renovation projects, and travel expenses, as it allows for larger purchases and longer repayment periods than BNPL. This payment option is offered by merchants at the point of sale, hence the name. It requires a credit check and typically has high interest rates and large monthly repayments.
Buy Now, Pay Later Companies
Who offers BNPL?
The biggest names include Affirm, Afterpay, Klarna, PayPal Credit, Zip, and Sezzle.
Which banks offer BNPL?
The most notable ones include Barclays, FIS, SoFi, and Synchrony.
Which BNPL provider is best?
Borrowing the results of Investopedia's review, the "Best Buy Now, Pay Later Apps of 2021" are as follows:
● Best overall: Affirm
● Best for flexible payment plans: Sezzle
● Best for students: Afterpay
● Best for no credit check: Splitit
● Best for bad credit: Perpay
● Best for small purchases: PayPal Pay in 4
● Best for large purchases: Klarna
BNPL for B2B
Although BNPL was originally built as a consumer-centric system, the B2B industry has started to show interest in the scheme.
In a conventional B2B transaction, suppliers can wait for days, even months, to be paid for invoices. BNPL in a B2B setting provides advantages to both sides of the transaction as suppliers can hold on to cash or working capital and the buyers get a chance to check the goods and services.
Contrary to the highlight of B2C BNPL where consumers are allowed to pay later, B2B BNPL enables sellers to "sell now, paid now" (SNPN) with the credit fee typically paid by the seller. B2B BNPL start-ups like Norway-based Tillit and Netherlands-based Biller also offer industry-specific specialisation or post-transaction services such as debtor management and guaranteed pay-outs.
However, B2B purchases are more complex as they might involve different entities (from sole traders to NGOs) and the ticket sizes are considerably bigger – making the verification process harder.
BNPL for merchants
The most common way to offer BNPL as a payment option for consumers is to involve third-party providers. Merchants can, of course, implement their own in-house BNPL plans, but a third party will deal with the headache of managing the instalment payments.
Merchants need two things to offer a BNPL option, namely an account with a BNPL provider of choice and a merchant-owned transactional website, an e-commerce platform, or a POS system that the BNPL provider can cover. After that, retailers only need to sign an agreement with the BNPL provider and then install the integration as instructed.
For online setups, the e-commerce software platforms below integrate with BNPL schemes:
1. Shopify: Clearpay, Klarna, Laybuy, Splitit
2. PrestaShop: Clearpay, Klarna
3. Wix: Clearpay, Laybuy
4. BigCommerce: Klarna, Laybuy
5. Ecwid: Clearpay, Klarna
6. WooCommerce: Klarna
Meanwhile, for in-store set-ups, Vend is currently the only POS system openly integrating Klarna as its BNPL option in the UK. Retailers can register with Klarna and add the option to their payment methods. Also accepting Klarna is Verifone card machines. However, it should be noted that not all Verifone merchant service providers openly offer integration with Klarna. Lastly, merchants can just send a payment link or show a QR code to customers from a Klarna merchant app. This way, retailers do not even need a POS system.
High-end POS systems will also agree to integrate with a BNPL provider if requested. Similarly, BNPL providers will help set up a connection with POS. This will likely involve technical coding with APIs.
BNPL for small businesses (SMEs)
Small businesses can use BNPL for both their B2C and B2B transactions.
BNPL for bill payments
Some BNPL providers offer a bill payment service, such as Australia-based Humm. Users can choose to pay a wide range of bills, ranging from phone, internet, gas, electricity, water to household, bond, and insurance. After signing up, users will be able to split the bill into several instalments – allowing better cash flow management.
BNPL for travel products
Several travel websites such as Carnical or Expedia will offer a BNPL option upon checkout, allowing consumers to make instalments over a fixed period to pay off their purchases on hotels or transport tickets.
Klarna allows purchases to be split into four interest-free payments, paid every two weeks but it requires a deposit at checkout, while Afterpay allows payment over six weeks. For a grand vacation plan, Afterpay, Uplift, Klarna, and Affirm also offer longer payment periods of up to three years.
BNPL for service providers
Depending on the nature of their services and the relevant regulations, service providers can use BNPL both for their B2B and B2C transactions through the same scheme as BNPL for bill payments.
BNPL for Customers
Does Buy Now, Pay Later affect your credit score?
Using BNPL services may or may not affect your credit card. While some BNPL providers do not require you to undergo a hard credit check, some do. Providers using soft or no credit checks include Affirm, Afterpay, Klarna, Zip, and PayPal.
BNPL providers that require hard credit checks most likely have the right to report missed payments to credit reference agencies. Therefore, late payment fees can negatively impact your credit score and when the debt is passed on to a debt collection agency, your credit score could even be more severely impacted.
BNPL average default rates
In a survey conducted by Cardify.ai, it was found that nearly half of BNPL users spent between 10 and 40 percent more than when they used credit cards. Another study found that at least 31 percent of users have made a late payment or incurred a late-payment fee, with 36 percent of them saying they were likely to do so in the next year.
However, many BNPL providers have denied leading vulnerable customers into debt. Klarna, for example, said its default rate in the UK is less than 1 percent, which is lower than the average for credit cards, while Laybuy claimed that its default rate is below 5 percent. But in the summer of 2021, Klarna's default rate doubled, according to the Financial Times' Q2 results and analysis.
What happens when a customer defaults on BNPL?
Most providers will terminate the account and demand the remaining balance be paid in full. Otherwise, the debt will be handed over to a third party to collect.
BNPL interest rates
As has been mentioned above, most BNPL services are interest-free.
Regulation of BNPL
BNPL regulation in the United Kingdom
BNPL products are not currently regulated by the Financial Conduct Authority (FCA). However, the UK government has announced plans to regulate the service. "Interest-free buy-now-pay-later credit agreements will be regulated by the Financial Conduct Authority (FCA) to protect consumers under plans announced by the government today," the UK government said on February 2.
Then on October 21, the UK government released its consultation on the regulation of BNPL. It said the consultation would remain open until January 6, 2022. Therefore, BNPL regulation in the UK is still in a grey area and users are not yet benefitting from Section 75 consumer protection despite the current regulation being within the exemption under Article 60F(2) of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001.
Section 75 laws require credit card providers to protect purchases above £100 for free, including against faults and non-delivery. However, the rules are void when a third-party payment processor is involved and breaks the direct link between a retailer and a credit card company, which is what BNPL providers do.
BNPL regulation in the European Union
BNPL regulation in the EU falls under EU rules on consumer credit. However, the regulation is currently very limited. But the European Commission has proposed an update to the rules to better protect consumers. The update demands information related to credit to be presented clearly to ensure users understand the product.
BNPL regulation in the United States
BNPL regulation in the US is currently also very limited. House Democrats only recently urged the Consumer Financial Protection Bureau to examine BNPL before making any regulations, with Republicans warning that stronger regulations could limit the financial flexibility BNPL currently provides to consumers.
Buy now, pay later is currently the fastest-growing online payment method in the UK. According to data compiled by Worldpay, BNPL schemes are projected to account for 10 percent of all e-commerce sales in the UK by 2024.
In Europe, the BNPL market is expected to grow to €300 billion (£260 billion) by 2025. This is equivalent to around 30 percent of total e-commerce consumption that year. According to the Worldpay report, 9 percent of e-commerce spending is expected to be processed through BNPL in 2023 and around 11 percent in 2025.
In the US, BNPL transactions had increased to 55.8 percent of the total online purchases by March this year from 37.65 percent in July 2020. Growth in the number of BNPL users mainly occurred in the age groups 18-24 (62 percent) and 55+ (98 percent) in that period. Around 36 percent of BNPL users reportedly use the service at least once a month.
In Australia, a similar trend was reported. BNPL has overtaken credit cards in terms of revenue. Credit card use started to decline in 2016-17 because people began switching to BNPL services. In 2019-20, it generated only around $300 million (£167 million) in revenue compared with $700 million (£390 million) through BNPL.