Although Buy Now Pay Later (BNPL) emerged before the pandemic, the attractive e-commerce payment option is soaring on post-COVID adoption.
BNPL provides short-term financing to online shoppers, allowing them to split the cost of purchases into affordable installments. For most shoppers, BNPL is a comfortable payment alternative since it lets them enjoy goods instantly while experiencing the benefit of spread-out, potentially interest-free payments.
While the trend began with innovative Fintech companies, global payment processors and banks like MasterCard and Goldman Sachs have taken notice. Consequently, BNPL is on an explosive growth trajectory, and estimates are that spending using the service will reach nearly $700 billion by 2025.
But what is behind the BNPL rise and how does it work?
How BNPL works
As the name suggests, BNPL lets buyers purchase goods, typically online, and pay later either in a lump sum or installments. As I see it, the process involves three parties: the merchant, the customer, and the BNPL provider.
Between the customer and the BNPL provider, the agreement is that goods will be bought and paid for at a later date (a grace period of sorts), usually within a few weeks or months of the purchase. During this grace period, the buyer can pay installments or the full debt at no interest.
But if the buyer does not make payment within the agreed period, interest may begin to run. Likewise, if the buyer misses an installment, they may be liable to pay late fees in addition to the outstanding installment.
Between the merchant and the BNPL provider, the agreement is that goods bought will be paid for immediately by the BNPL provider. This way, the merchant need not wait potentially several months to receive full payment and can enjoy optimal liquidity. In exchange, the merchant agrees to pay the BNPL provider a percentage of the sale price (between 2-8%) for the service rendered.
Due to the fact that BNPL provides ease and convenience for both buyers and sellers, the payment trend has secured wide approval. Some of the major BNPL providers globally include firms like Affirm, Ant Financial, Afterpay, Klarna, Zilch, Flava, MasterCard, Visa, and PayPal.
Rapid spread of BNPL
As described by e-commerce platform VTEX, BNPL is currently the “fastest growing way to pay in the developed world.” To underscore just how fast the payment trend has grown since COVID, one study reports that BNPL use quadrupled in 2020.
While the trend is highest amongst younger shoppers, the affordable payment option is popular amongst adults of all ages, according to the BBC. Compared to credit cards, users see BNPL as a simpler and more transparent alternative since it avoids the complex terminology and conditions associated with bank cards.
The top reason why people adopt the payment method is its ease and convenience. Because it is instantly available and potentially more forgiving than credit card loans, buyers feel more confident adopting this payment option.
Likewise, merchants possibly attract higher average order volumes because people tend to spend between 10-40% more with BPNL. They’re also more likely to overcome buyer hesitancy because BPNL encourages more convenient returns – it’s easier to test out a product when you don’t have to pay immediately. It also works wonders for cart abandonment. In fact, Afterpay reports that 69% of millennials and 42% of Gen Z shoppers are more likely to complete the buying journey when BNPL is offered.
However, despite its clear advantages to buyers and merchants, there are several unavoidable red flags with BPNL. In my opinion, unrestrained lending will only help perpetuate the ongoing global consumer credit debt crisis. Besides, consumers are naturally prone to underestimating risks and overestimating benefits, which might work to put many people in more debt than they expect.
While countries like the UK are already working on potential regulations for the sector, the question is: can they work fast enough to pass needed guidance before consumers get in way over their heads?
by Doğan Erbek and STF Team