Before now, customers purchasing items on credit from a store had two options; the first is the layaway program which allows the store to reserve the item for the customer while the payment is being made in installments, after which the customer receives the merchandise upon completing the payment. The second option is to place the item on a credit card.
While the latter is still in place, with 79% of shoppers having at least one credit wallet, the former is going into extinction. Rather, they are being replaced by a new and more flexible payment option: Buy Now, Pay Later (BNPL), which is operated by third-party credit experts.
And although the purchase model does not involve an interest rate (rather, the BNPL vendors charge the retailers a fee), retailers make up for this by having more sales. Besides, BNPL has helped neutralize the credit market as it continues to enjoy massive popularity amongst those who are unable to use their credit cards to purchase items for several reasons.
BNPL: Definition
Buy Now, Pay Later, as the name suggests, allows customers to instantly purchase an item and pay later, usually over several equal installments. The model divides the purchase into several equal payments, with the first payment typically made at the checkout point. The remaining payment is then billed to the customer’s credit or debit card until full payment is made. And although BNPL does not affect your credit card score, defaulting or late payment can destroy your credit card score as it will be reported to the credit card bureau.
While BNPL has existed for years, the model experienced a surge in popularity during the covid-19 pandemic as more shoppers shifted to online shopping. Today, several eCommerce sites offer BNPL.
BNPL: How Does It Work?
Although not all Buy Now, Pay Later programs function the same way, as some companies have their terms and conditions, most point-of-sale installment loans (which BNPL is an example of) function in the following pattern:
- Normal Purchase and Checkout Process: The customer purchases from an ideal online store and prepares to make payment.
- Retailer Presents the Option of BNPL: During the checkout process, the customer is given a choice to select credit card, debit card, or BNPL payment. Customers that choose to go with BNPL will click on the option.
- Lender Does a Credit Card Check: When choosing the BNPL option, the lender requests personal details such as social security number and home address. After this, the lender runs a minor credit card check to determine the customer’s credit card history, which will determine whether the customer will pay back. Note that the check will not be reported to the credit bureaus and will not impact the credit card score like a full credit check would.
- The Lender charges the Retailer a Fee: Since third-party vendors manage BNPL, the vendor takes a percentage (usually between 2% to 8%) of the transaction from the retailer. This arrangement is like what happens with traditional credit card companies.
- The Customer Receives the Goods and Pays off Over Time: Next, the customer receives the goods and pays off over time. Payments made within a short time (typically within 30 days of purchase) usually do not attract interest. If more time is required, the lender offers different payment options with varying interest rates. Generally, like credit cards, the faster the customer pays, the lower the interest rate. Payment can be made using fast payment service providers.
Advantages of Buy Now Pay Later
There are many advantages of BNPL, including the following:
- Offers Convenient Payment Option: With BNPL services, you can make full payment or pay in bits over a period. The payment system is convenient, disciplined, and flexible.
- Serves as an equalizer for those without credit cards: While most people have credit cards, some do not (about 20%), while even those with credit cards (55%) have used up at least one card. With BNPL, you get the same benefits as credit cards, but only for smaller, individual purchases. Like credit cards, BNPL even allows you to request an online card number ahead of your purchase. The number will cover the amount needed to buy the product. This can be done through the BNPL smartphone app or the vendor’s site.
- No Damage on Credit: Unlike hard credit card checks, which carry out a thorough investigation and report findings to your credit card bureau, most BNPL vendors carry out soft credit card checks to determine eligibility for a loan, which will not affect your credit card status. However, a late payment will get you reported.
- Zero or Low-Interest Rate: Choosing a short loan period and making prompt payment often attract zero interest rate. Besides, you can choose a repayment option that best suits you.
Downsides of Buy Now, Pay Later
BNPL is not without its downsides, and they include the following:
- Doesn’t Build a Good Credit: Buy Now, Pay Later does not establish a good credit system as traditional payment methods do. Also, missing out or delay in payment can damage your credit card score.
- Returning Defective Items Can Be Complicated: Often, returning an item bought via BNPL can be complicated. While you will likely get your money back, there might be delays as the merchant must inform the BNPL lender. In the meantime, though, you will have to keep up with the repayment, or the payment will be termed lagging, which may affect your credit card score.
- No Rewards on Purchases: Unlike traditional payment methods with certain perks, such as discounts and freebies, BNPL does not attract any of these.
Bottom Line
BNPL has come to stay. According to research from Ecommpay, a bank acquirer and global payment service provider, 25% of consumers used BNPL in 2022 than in 2021, while 27% of shoppers already use the payment option. Given this surge, eCommerce businesses must consider ways to offer this service to their customers. This way, there are increased sales activities, accessibility, and brand acceptability.
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