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Buy now, pay later (BNPL) is a type of short-term financing that allows consumers to make purchases and pay for them at a future date.^[1] BNPL is generally structured like an installment plan money lending process that involves consumers, financiers, and merchants. Financiers pay merchants on behalf of the consumers when goods or services are purchased by the latter.^[2] These payments are later repaid by the consumers over time in equal installments. The number of installments and repayment period varies depending on the BNPL financiers.^[3]

History

The earliest form of BNPL traces back to the 19th century, when installment plans emerged as a way for consumers to purchase expensive goods (e.g. furniture, pianos and farm equipment) they did not have the funds to buy outright.^[4] In India, BNPL is considered similar to the country's traditional paper-based Udhar Khata system, where corner shops, known as kiranas locally, kept manually logged credit ledgers to allow their customers to buy provisions on credit and repay them later.^[5]^[6]

In the early 21st century, fintech companies developed systems that allowed installment plan lending to be integrated into the payment flow of online shops, allowing a consumer to receive instant credit at the point of sale and pay for a purchase later, based on an agreed schedule. The integration and instant processing elements are what sets BNPL apart from other approaches to consumer lending.^[7] The COVID-19 pandemic era produced a massive increase in BNPL transactions in the United States, going from $2 billion in 2019 to $24.2 billion in 2021.^[8]

Usage

BNPL has been described as "similar to a credit card but without the hassles of an application process, card-swiping infrastructure, and separate limits for purchases and cash withdrawals".^[5] Retailers that partner with BNPL financiers can offer customers the option to pay for purchases using BNPL. If a customer opts to complete the purchase using BNPL, the financier will typically carry out a soft credit check^{[note 1]} on the customer, and return a decision within seconds. The financier pays the merchant if approval is received, and offers the customer various repayment options. These may include delaying the payment for a short period of time, or spreading the full balance over several smaller payments.^[10]

The service is offered for free to the customer, assuming repayment is made. BNPL financiers take a cut from the purchase price of anything they help the merchant to sell.^[10] This fee tends to be higher than typical credit or debit card transactions, with processing fees ranging from 2% to 8% per transaction, compared to 1.3% to 3.5% for credit cards.^[11]

When consumers fall behind on payments, late fees are typically charged by their financiers, and persistently delinquent accounts may be sold to debt collection agencies.^[12]

In March 2024, NBC News reported that consumers ages 35 and under comprise 53% of “buy now, pay later” users but just 35% of traditional credit card holders.^[13]

Issues and criticisms

Normalising debt

BNPL has been criticised for instilling a false sense of financial security in consumers, which could lead to impulse shopping and they might end up spending money they do not have.^[14] A 2024 Bankrate survey found that among those polled 56% of BNPL users had issues with overspending, missing a payment or regretting purchases.^[15] Influencer marketing of BNPL platforms on social media adds to the attractiveness of using BNPL credit to purchase items, and influencers have been criticised for normalising debt by marketing it as "fun", thereby encouraging overspending.^[16]

Lack of regulatory oversight

Consumers that use BNPL generally are less protected by regulation, as compared to other financing options.^[17] The BNPL industry remains unregulated or self-regulated in many countries.^[14]

Although BNPL payments are usually interest-free, financiers have been noted to report defaults more frequently than successful repayments to credit-rating agencies, potentially putting the credit rating of consumers in jeopardy.^[18]^[19] Checks conducted by financiers on credit bureau scores have also been critiqued for being scant. These checks are cursory, if conducted at all, and mainly evaluate income statements only.^[5]

Notes

^ 'Soft' credit checks do not impact a customer's credit score, in contrast to 'hard' checks which can.^[9]

References

^ "What Is Buy Now, Pay Later?". Investopedia. Archived from the original on 27 May 2022. Retrieved 26 May 2022.
^ "The growing popularity of 'buy now, pay later' in Singapore". KrASIA. 9 May 2022. Archived from the original on 20 May 2022. Retrieved 26 May 2022.
^ "Key Differences Between BNPL and Traditional Lending: Tips for Making the Right Financial Choice - Wheon". 2024-11-01. Retrieved 2024-11-02.
^ Boxell, James (15 September 2021). "How Old-Style Buy Now, Pay Later Became Trendy 'BNPL'". Bloomberg.com. Archived from the original on 13 December 2021. Retrieved 13 December 2021.
^ ^a ^b ^c Jain Kaushal, Teena; Adhikari, Anand (7 January 2022). "Are We Headed for a BNPL Trap?". BusinessToday.In. Archived from the original on 29 May 2022. Retrieved 29 May 2022.
^ "Indian millennials are buying now and paying later during uncertain economy". KrASIA. 21 December 2021. Archived from the original on 14 March 2022. Retrieved 29 May 2022.
^ Gerrans, Paul; Baur, Dirk G; Lavagna-Slater, Shane (21 July 2021). "Fintech and responsibility: Buy-now-pay-later arrangements". Australian Journal of Management. 47 (3): 3–4. doi:10.1177/03128962211032448. S2CID 237670221.
^ Paige Sutherland; Meghna Chakrabarti (May 10, 2024). "The unregulated boom in the 'buy now, pay later' market". WBUR.
^ "What Are Inquiries On Your Credit Report?". www.experian.com. Experian. 4 May 2021. Archived from the original on 13 December 2021. Retrieved 13 December 2021.
^ ^a ^b Sheikh, Rahil (13 December 2021). "Buy now pay later: How does it work?". BBC News. Archived from the original on 13 December 2021. Retrieved 13 December 2021.
^ "Buy Now Pay Later (BNPL), Is It Feasible?". Penser. 5 April 2021. Archived from the original on 20 March 2022. Retrieved 29 May 2022.
^ Espiner, Tom (2 September 2021). "Buy Now Pay Later: 'I'm stressed over debt'". BBC News. Archived from the original on 13 December 2021. Retrieved 13 December 2021.
^ "'Buy now, pay later' goes from niche to normal as young people use it for daily essentials". NBC News. 2024-03-10. Retrieved 2024-03-10.
^ ^a ^b "'Buy now, pay later' is taking off in Indonesia, but risks are high". KrASIA. 27 September 2021. Archived from the original on 11 October 2021. Retrieved 29 May 2022.
^ Rivera, Heidi (11 April 2024). "Survey: 56% of buy now, pay later users have experienced issues like overspending and missing payments". Yahoo Finance.
^ de Gallier, Thea; Day, Harvey; Price, Hannah (10 February 2021). "Influencer: 'Why I stopped working with Klarna'". BBC Three. Archived from the original on 14 December 2021. Retrieved 14 December 2021.
^ Paul, Trina (9 October 2021). "What consumer protections do you have with 'Buy Now, Pay Later' services? Here's what you need to know". CNBC. Archived from the original on 1 December 2021. Retrieved 1 December 2021.
^ Geron, Tomio (4 October 2021). "Invest now, win later: Inside the 'buy now, pay later' gold rush". Protocol. Archived from the original on 1 December 2021. Retrieved 1 December 2021.
^ Akeredolu, Nelson; Braden, rew; Friedman, Joshua; Udis, Laura (6 July 2021). "Should you buy now and pay later?". Consumer Financial Protection Bureau. Archived from the original on 1 December 2021. Retrieved 1 December 2021.