Buy Now, Pay Later (BNPL) - the pros and cons.
Innovation, targeting consumer convenience and experience have led to many disruptions in the consumer credit market. Most recently, a new consumer credit business model known as ‘Buy Now Pay Later’ (BNPL) has become popular.
BNPL providers such as Klarna, Laybuy, ClearPay, and Paypal Credit work with retailers to give consumers access to upfront credit to help them make their purchases. Repayment of the credit can either be staggered in fixed repayments over an agreed-term or settled in a one-off payment at an agreed date.
So, How Does Buy Now, Pay Later Finance Work?
Before getting into the pros and cons of the BNPL model, we need to understand how BNPL works, step by step:
- Step 1: You shop for an item online and head to checkout;
- Step 2: At checkout, the merchant shows the acceptable payment options including ‘buy now pay later’;
- Step 3: You either sign up or log into their BNPL provider platform;
- Step 4: The BNPL provider assesses the credit risk of the consumer and conducts other procedures;
- Step 5: If satisfied, the provider approves the credit
- Step 6: The product is then delivered by the merchant to the customer;
- Step 7: At agreed dates, the consumer makes payments to their buy now, pay later provider.
Klarna’s “pay in 3” offer means the cost of your purchase is divided into three payments, made every 30 days – the first payment at the time of purchase, the final 60 days later. There is no interest or fees to pay at purchase. It may be a better alternative to a credit card.
So, What Are The Pros of Buy Now Pay Later Finance?
There are benefits for both merchants and consumers. Here’s what to expect when you use it.
- Instant access to credit: BNPL is classified as a ‘during purchase’ payment option. By giving customers instant access to credit at the point of purchase, it improves their shopping experience. You can be approved in under a minute by some providers!
- Easy to use: BNPL use targeted and highly customised technology enabling consumers to interact frictionlessly with them. Klarna for instance has a QR code that consumers can scan to make a payment.
- Flexible Payment Arrangements: At the heart of the BNPL innovation is offering credit to consumers and letting them pay later with either a one-off payment or in instalments, helping shoppers organise their finances smoothing payments over a longer period.
- Low to zero cost of credit: BNPL credit is normally fee-free and interest-free, so long as you don’t miss a payment. Most providers make their money from the commission they charge merchants. LayBuy for instance, charges merchants a 4.75% fee and no fees to shoppers.
- Bad credit consumers may benefit: Those with poor credit scores can benefit from BNPL credit because not all “fintechs” do hard credit searches, completing soft searches which don’t have an impact on your credit score.
- Boost your credit rating: If you use buy now pay later responsibly, borrowing what you can afford to repay, paying on time, your credit score may be enhanced if the BNPL company reports to credit bureaus. Not all do.
So, What Are The Pros and Cons of Buy Now Pay Later Finance?
Everything has pros and cons.. Despite the pros above, buy now pay later has a number of disadvantages you need to look out for.
- Missed payment fees: Stick to the rules and the use of BNPL means you won’t be charged any fees. Delay or miss instalments, and you will be charged penalties and fees. Klarna, for instance, charges fees for every delayed repayment for order values above £200. ClearPay has a late payment fee ceiling of 25% of the total order value.
- Negative impact on credit score: Pay late, and the credit provider may report your behaviour to the credit reference bureaus. Your rating will be damaged and this may jeopardise your chances of being approved for other forms of credit in future.
- Buying on Impulse: BNPL makes it easy to impulse buy or splurge. Believing you can pay later creates an illusion that you can afford almost anything and may push you deep into debt. Frequently purchased items such as clothing, health and beauty products or electrical items may look like small-value items, but their cost can quickly mount up.
- High-Interest rates: Some BNPL firms have credit options available to customers at checkout. These financing options give customers a revolving account similar to a credit card arrangement. Rates may be high.
Are Buy Now, Pay Later firms regulated?
BNPL providers, unlike 1Plus1 Guarantor loans, are currently not regulated by the FCA, who believe it is easy to build up unseen debts of £1000 or more, possibly causing financial difficulty and are pushing to regulate BNPL firms. BNPL providers will be required to conduct hard credit checks on consumers in addition to affordability tests before extending credit.