With the growing popularity of on-demand services and the rapid growth of e-commerce, more and more consumers want to be able to get products now and pay later.
While banks have long been looking for solutions to their problems, offering credit programs to customers often seems complicated. This usually involves providing various documents, and the risk of loan rejection can be relatively high. This is why startups and fintechs have developed “buy now, pay later” (BNPL) solutions.
Although it got a real boost during the Covid-19 pandemic, buy now, postpay financing is gaining popularity relatively quickly among buyers.online sale soaring and customers locked in their homes start Buy even more than in the pre-pandemic period. BNPL services allow customers to buy as much as they want; however, this financing option is not without certain risks.
This article will explain what BNPL is, how it works, the pros and cons of this type of loan.
What is buy now, pay later?
Buy now, pay later is a short-term loan that allows customers to purchase a product in equal installments, usually without interest. BNPL is best for purchasing consumer goods. For example, you will not acquire any property or pay college loans at BNPL.
Instead, you can buy something from an e-commerce store or brick-and-mortar store. In other words, buy now, pay later is just one of many convenient payment methods available in online and offline stores.
Various fintech companies offer “buy now”, “pay later” services, including Klarna, PayPal, American Express, and more.
The number of BNPL quotes continues to grow.According to Statista, the global use of the service in domestic e-commerce payments has already Increase From 0.4% in 2016 to 3% in 2021, most prevalent in 41 countries, Sweden – 25%, Germany – 20%, Norway – 18%, Finland – 13%, Denmark – 12%, Netherlands – 12 %, Australia – 11%, New Zealand – 10% and others.
There are many reasons why consumers prefer to use BNPL solutions over credit cards. Here are a few:
- The financial instability of the pandemic and the inability to pay for goods all at once, with customers splitting payments into smaller portions;
- The possibility of buying more items at once, as the first payment is less than 50% and the rest is spread over weeks or months;
- Unlike many credit services, BNPL performs soft credit checks, which means the service does not remove any credit points from a customer’s credit score;
- Simple and easy to organize. Therefore, BNPL is also known as “point of sale installment loan” because customers can use it directly at checkout;
- BNPL provides specific dates when installments are due, so buyers always know when they have to pay next.
How does buy now, pay later work?
By opting for the BNPL solution, clients can benefit from microloans with installment payments. They can be paid weekly, bi-weekly or monthly. Payment terms depend on the specific conditions of the service.
Typically, BNPL charges interest on the use of their services, although they usually offer an “interest-free” period. Therefore, if a customer manages to pay off the balance within the interest-free period, they will not be charged interest. However, if the buyer defaults on payment, they will have to pay the outstanding instalment with accrued interest.
Here’s a step-by-step example of how Buy Now, Pay Later works.
- A customer makes a purchase of $300 and decides to use the BNPL payment method; the payment option can be located in the shopping cart of a retail e-commerce site or at the checkout of an offline store;
- BNPL performs a customer’s credit check (in most cases this is a soft credit check) and decides whether they can use the service;
- When the client is approved, he has to pay a small deposit such as 20% to 30% of the total amount;
- The remainder is divided into equal instalments, which must be paid by a specific date;
- The customer receives his purchase and pays the remaining amount by direct debit, check, bank transfer, debit card, bank account or credit card; in many cases this amount will be withdrawn automatically.
Advantages and disadvantages of buy now and pay later
Like any service, BNPL has its pros and cons. Let’s look at the most important.
no reliable credit check
Many lenders conduct thorough credit checks to determine whether their customers can use their services. This type of verification may remove certain credit points from a customer’s credit score, but it does not guarantee credit will be given.
On the other hand, BNPL providers mostly do soft pulls on their customers’ credit without hurting their credit ratings. Also, it is much easier for customers to get a BNPL loan because the amount lent is not large.
interest free period
BNPL companies are interested in gaining more customers and staying ahead of their competitors. That’s why they often offer responsible customers interest-free periods that don’t involve paying interest.
When applying for a BNPL loan, customers do not need to provide many documents or confirm their bank account or business details. Additionally, BNPL performs quick checks to minimize processing time. Payment methods are also convenient as customers can pay using debit/credit cards, checks, wire transfers, and more.
Additional fees for late payment
BNPL is the perfect solution for responsible customers who never forget to pay on time. Unfortunately, if a buyer misses their payment date, they will be charged a late fee that usually increases over time.
After arrears, BNPL providers start charging their customers interest, which increases with each payment until the full amount is paid. As a result, interest rates can be relatively high, sometimes even higher than deposit rates.
micro credit line
Different BNPLs have different loan limits, ranging from a few hundred dollars to one or two thousand dollars. This is because the service was created for small purchases. This way, the loan hardly depends on your income.
won’t improve your credit score
On-time BNPL payments will not improve your credit history as they are not reported to credit bureaus. However, if you miss some payments, the BNPL provider may report it and your credit score may deteriorate.
makes you want to buy more
By using BNPL, you may think that you are able to buy more than you can actually afford. This happens because the BNPL service only requires payment for small items. So if consumers really need something unique on Amazon, or if they’re just swayed by immediate needs, they have to think twice.
Buy now, pay later is a convenient service that allows shoppers to get the products they want instantly in online and offline stores. Therefore, in order to provide customers with a superior experience and increase their purchasing power, merchants integrate BNPL financing options into their services.
If you’re still looking for ways to develop a BNPL solution for your digital or brick-and-mortar store, Scand Corporation is ready to help. Scand (dotcom – software) is a successful FinTech provider with over 20 years of experience in the international software development market.
Image source: provided by the author; thank you!