Recent news of a multi-billion-dollar deal between financial technology companies sparked renewed conversation about consumer payment options in both e-commerce and traditional retail settings. Square announced a purchase deal to acquire Afterpay, a buy now pay later technology firm, for $29 billion in September 2021, with Square noting the shared desire to offer more payment solutions to its merchant customers.
The buy now pay later trend, often referred to as BNPL, is not a new concept. However, the Afterpay acquisition combined with burgeoning growth in installment payment preferences among today’s consumers has some looking more closely at how buy now pay later options fit within the greater payment landscape.
How Buy Now Pay Later Works
Buy now pay later options were traditionally reserved for big-ticket items. Retailers selling appliances or furniture offered installment payment options in an effort to draw in more budget-conscious customers, without forcing them to use a credit card. Customers would make a purchase but only pay a small portion of the total purchase price, agreeing to pay the remaining balance via fixed payments over the course of several months or a few years.
Today’s BNPL options work the same. However, consumers can opt for installment payments on much smaller purchases from a variety of retailers online and in person.
Retailers connect with buy now pay later services, like Afterpay, Klarna, and Affirm, to offer installment payment options to their customers. When checking out, customers can opt to pay in four to six equal installments instead of paying all at once. These installment agreements do not charge interest, and no credit check is needed. So long as payments are made as agreed, consumers can break up the cost of their purchases over time, making them seem more affordable.
Younger generations of shoppers are flocking to buy now pay later installment agreements. Afterpay alone touts more than 16 million customers, and total BNPL sales will have ballooned to an estimated $100 billion for 2021. But the question remains if installment payment agreements are the best option for cash-strapped or budget-conscious consumers. It is worth looking at the pros and cons to decide.
The Pros of BNPL
The most obvious advantage to buy now and pay later for consumers is the option to make larger purchases that they may not normally take on. Paying four installments of $50 over the course of four months makes a $200 purchase feel more in reach.
Breaking up the cost burden helps consumers budget their spending, at least in theory. Retailers benefit from this payment option just as much, as they may be able to appeal to broader market demographics when various payment options, beyond traditional credit card or debit card selections, are available.
In addition to the reduced financial burden of upfront payments, consumers also appreciate that BNPL does not require a credit check. Unlike credit cards, buy now pay later providers allow consumers to sign up by answering a few questions and providing contact information. Payments are not reported to the credit bureaus, and nearly anyone can use an installment payment plan offered by a retailer.
Finally, buy now pay later agreements do not charge interest to consumers. There are no sign-up fees or costs associated with breaking up payments. This has been the main draw for younger generations of consumers who are looking for credit card alternatives when shopping. Retailers bear the cost burden, ranging from 3 to 6% of the transaction, as well as commissions charged by the BNPL provider.
The Cons of BNPL
Although buy now pay later agreements are attractive to many, downsides exist. First, consumers do not get the benefit of credit reporting that comes with credit card use. No information about these installment payment plans is reported to the credit bureaus. However, the negative consequences of failing to pay for a BNPL purchase could have the same ramifications as missing a credit card payment. Providers can report missed payments to a consumer’s credit file and pursue collection remedies if they see fit.
Additionally, the no-cost appeal of BNPL agreements can quickly turn sour if consumers aren’t paying close enough attention. Some providers charge fees for changing a payment due date or when a payment does not go through. Late fees can be as high as 25% of the total purchase, putting consumers in a costly cycle. The fine print for buy now pay later installments may be hard to find or easy to dismiss, leaving consumers at a loss when fees start to add up using this method.
Most importantl, though, is the question of true affordability with BNPL agreements. Consumers feel as though installment payments broken up over time are more doable than a larger, single upfront payment. However, the ability to have multiple buy now pay later agreements in place can create a heavy financial burden month to month. Some critics of BNPL argue that these plans perpetuate consumerism in the worst way, making buyers feel as though they can afford far more than their budget allows.
What to Consider When Looking at BNPL as a Consumer
Buy now pay later agreements offer a helpful alternative to credit cards for certain consumers. Without interest charges and other upfront fees, no credit reporting, and no application necessary, buyers often appreciate the option to break up payments for purchases of nearly any size, under the guise of affordability and more control. However, it is essential to understand that not all that glitters is gold.
Only those consumers who have a strong handle on their cash flow month to month can accurately evaluate the affordability of BNPL purchases. Those who are buying without this understanding of their financial situation may find more challenges ahead than benefits. The fees for changing the installment plan or missing a payment can be high, and spending too much too quickly remains an issue. As more retailers partner with buy now pay later providers, consumers should take the time to consider what is truly best for their financial situation, both now and later.
