Buy Now Pay Later A Good Idea For Consumers?
Buy Now Pay Later, You don’t need us to tell you that everything is getting more expensive in October prices on some of the most common goods rose 6.2 from a year ago that includes apparel where prices have risen nearly 4 since October 2020 and electronics like televisions.
Which have seen prices jump 10 percent over the same period with these rising costs consumers are naturally looking to stretch their money that much further and maybe put off that bill a little bit longer enter buy now pay later companies like affirm Klarna zip and after pay have seen an explosion in popularity over recent years.
They’ve amassed millions of customers and thousands of partnerships with companies like target amazon and more and they’re expected to keep growing so what does that rapid growth of buy now pay later services mean for e-commerce and the consumer okay let’s back up for one second what exactly is buy now pay later.
How does it work and how does it differ from traditional credit cards well buy now pay later is basically a way of spreading out your payments over a relatively short time period it’s usually for small purchases at a retailer and instead of paying everything up front you can break out those payments over two months three months sometimes even longer.
While most of these businesses offer short-term interest-free installment plans there are longer-term plans that do carry interest the plans can be used at a number of retailers and they’ve quickly disrupted the traditional store credit card business well most directly at risk actually and this might not be the first names that come to mind are companies like synchrony and alliance data systems.
This Companies provide the private label credit cards to retailers those traditional cards where you know you got a sax card or Bloomingdale’s card and the most direct thing that by now pay later is substituting for is a really modern version of that kind of retailer specific private label card.
The risks of buying now pay later programs
So they’re probably the most directly at risk a firm reported 8.7 million active users in its previous quarter a 124 increase from a year ago in June after pay boasted 16.2 million active users up 63 percent from the year prior over the past 12 months 37 percent of Americans made use of a buy now paid later plan compared to 29 who used a personal loan and 12 percent of bnpl borrowers said they used the service five or more times in a year.
So buy now pay later is something that happens at the point of purchase and you actually opt into it as you make your purchase personal loans are a totally different category generally designed for bigger size loans spread out over a longer period so for example maybe you’re considering a home renovation and you need to take out a loan for thousands of dollars that’s something that wouldn’t make sense.
For buy now pay later but a personal loan that you can sign up for and stretch out over a period of time probably longer than a year Europe in particular is leading the adoption of buy now pay later 23 of e-commerce transactions in Sweden home of Klarna are now done with buy now pay later services that number is 19 in Germany and even the uk where bnpl accounts for five percent of e-commerce transactions.
Which leads the us based on our research around 10 million consumers in the uk have used a form of bino pay later in the past 12 months and around 20 000 merchants in the uk now offer a bino pay later to their customers those figures however are rising rapidly especially because binomial later providers are on boarding new merchants into their ecosystem at a rapid pace.
All those users mean big money by now pay later services accounted for 97 billion in e-commerce payments in 2020 that’s according to American payment processor WorldPay and more and more merchants are hopping on board a firm reported 102 000 participating merchants thanks to e-commerce company Shopify.
The benefits and risks when using buy now, pay later for holiday shopping: Credit experts
Adding support for the brand and the company just launched a new partnership with the world’s most popular online shopping site amazon we’re seeing everyone bnpl has arrived in a sense that half of Americans are fully aware of what it is and are considering using it or are using it it’s no longer just for this demographic or that it’s both gen z and gen x and everyone in between.
So what does the growing availability of these services mean for consumers 77 of respondents told us that buy no pay later actually helps them to spread out the cost of purchases and helps them to better manage their finances and in fact over the course of 2020 we estimate that binoculator users in the uk saved around 103 million pounds in credit card charges bnpl also gives shoppers with less than ideal credit history access to funds because many of these services use their own algorithms to determine a borrower’s ability to pay not just a traditional credit score.
So if you’re looking around and shopping and you don’t have a credit card you know you don’t have a strong credit history you still get the option to sign up for buy now pay later when you’re making a service and with just a few clicks you can opt into that and you’ve spread out your payments into something that feels more manageable for your budget.
Then there are the merchants bmpl services provide merchants with new customers they may not have reached before 23 of stores said they could track a customer’s purchase to a direct referral from a bnpl partner 75 meanwhile said by now pay later was a key part of their growth plan over the next year 57 of merchants using bino pay later in uk reported an increase in basket conversion.
And 47 of merchants actually experienced an increase in average order value by now pay later can even be beneficial for payment processors like visa and Mastercard because customers make payments to bnpl companies with debit cards while these new methods of financing provide much more flexibility for consumers it does come with some risks as spending rose during the pandemic.
The amount of debt consumers were taking on rose two and some couldn’t afford to pay that back a third of bnpl users reported falling behind on at least one payment according to credit karma of those 72 percent reported a hit to their credit score for doing so the consumer financial protection bureau warns that some by now pay later brands could charge hefty fees for late payments.
They could even hand your debt to collectors but many bnpl platforms don’t report payment history at all the buy now pay later providers they’re not typically reporting to the credit bureaus that means they’re not a way to build your credit so if you’re looking for a way to build your credit.
It could be harder to make a returns with a BNPL loan
Which would allow you to qualify for other kinds of loans by now pay later doesn’t help you get there bnpl can also make it easier to buy things you can’t necessarily afford 57 percent of users said they regretted their purchase because the item was too expensive at the end of the day a bnpl purchase is still dead final pay later it’s still a form of debt you’re still taking on debt you have to pay it off.
If you miss a payment there could potentially be penalties like fees added that does vary by type of provider so you want to make sure you understand what you’re getting into but the bottom line is that final pay later is still a form of debt that you’re taking on and you have to eventually pay off according to a study by cnr research.
Two-thirds of shoppers believe that bnpl is quote financially risky despite this by now pay later companies argue that the services are safer than using a credit card one of the big differences in the binocular model is we approve each transaction individually therefore underwriting it individually it gives us a lot more control over the exposure we take on and far more importantly from my point of view the exposure our consumers are allowed to take on the reason bmpl is such a better alternative to credit cards is you’re not just piling it along to a single revolving credit and you know hope to pay it off later you’re actually making a conscious choice to say.
Hey this is a plan I will be done paying for this gift or this item for the next six weeks or six months so when should you use buy now pay later according to Kim palmer a personal finance expert at nerd wallet use a debit card if you have the money because you don’t have to sign up for an extra service if you have an established credit history or credit card you may qualify for zero percent interest on your purchases.
And if you don’t have an established credit history or no credit card bnpl can be a good option for spreading payments over a set period from a consumer’s perspective it’s all about comparing the options that are available to you and for a lot of consumers buy now pay later might be the best one that they have that’s available beyond consumers some critics have raised concerns about.
The lack of protections and regulations in place for these bnpl providers in 2020 after pay was forced to refund hundreds of thousands of dollars in fees to California customers after the state deemed the company had been issuing illegal loans California said the credit sales were structured specifically to avoid consumer protections but the truth is the regulation of these businesses in the u.s is murky by now pay later services are not technically loans but installment plans.
This means many of the u.s laws and regulations around lending don’t apply here these products also raise important questions about the use of consumer data the expert exploitation around spending patterns the application of lending laws and the potential for unsustainable levels of consumer debt the uk could actually provide the u.s with a road map for regulation.
What we’ve seen is that the regulators in the uk have been very progressive and innovative in recent years and i think they’ve managed to find a very good balance between fostering innovation on one side but then also regulating new sectors like fintech and new emerging technologies such as final pay later or open banking lawmakers in the uk are considering bringing buy now pay later services under the supervision of the financial conduct authority.
Which regulates financial services firms and markets in Britain it would mean stricter guidelines for who bnpl services can lend to and how much it also means consumers will have a government authority with which they can raise complaints what we’re seeing in the uk whereby the regulator is actively looking to shape regulation for the bino pay later sector is indeed likely to be copied by other regulators across the globe including in the U.S.
When it comes to holiday shopping this year, it might be so tempting to use a BNPL loan to finance the purchases that you’re buying in advance. While BNPL loans are now convenient and easy to use, you should be reading all the documents before the fine print before you sign up.
Holiday shopping can cause many people to overspend which will create urgency of money, so the first thing you should be aware of whether you need it when using BNPL loans is whether you can afford the item you’re purchasing. You should always ask the experts and also be paying close attention to a provider’s terms and condition and their return policy, whether they report to credit bureaus and their interest rates and late fees.