BNPL Explained: What Buy Now, Pay Later Means For Shoppers

BNPL or simply “Buy Now, Pay Later,” is a payment option that’s shaking up the world of e-commerce. BNPL allows shoppers to make purchases and spread the cost over time, often without interest. It’s gaining popularity as an alternative to credit cards and personal loans, with companies like Affirm, Afterpay, and Zip leading the charge.

What is Buy Now, Pay Later (BNPL)?

Buy Now, Pay Later (BNPL) is a type of short-term financing that allows consumers to make purchases and pay for them over time. As the name suggests, it lets shoppers buy items immediately and spread the cost over a series of installments. This payment option has gained popularity as an alternative to credit cards and personal loans, especially in e-commerce ^[1].

How it Works?

When making a purchase, customers can select the BNPL option at checkout. They’re then redirected to the BNPL provider’s site or app to create an account or log in. After a quick application process and a soft credit check, which doesn’t affect the credit score, the provider approves or denies the application within seconds ^[2].

If approved, the customer typically pays a small portion of the total purchase price upfront, often 25%. The remaining balance is divided into equal installments, usually paid over six weeks. For example, a $100 purchase might be split into four $25 payments, with the first due at checkout and the rest due every two weeks.

Key Features

1. Interest-free payments: Many BNPL services offer interest-free installments if paid on time.
2. Quick approval: The application process is usually fast and straightforward.
3. Flexible repayment: Customers can choose their preferred repayment schedule, often bi-weekly or monthly.
4. No hard credit check: Most BNPL services perform only a soft credit inquiry, making them accessible to those with limited credit history.
5. Transparency: Unlike credit cards, BNPL platforms typically don’t have hidden charges, making it easier for users to understand their financial commitments.
6. Wide availability: Many online retailers now offer BNPL options, making it a convenient choice for e-commerce shoppers ^[3].

The Rise of BNPL in E-commerce

1. Growth Statistics

The Buy Now, Pay Later (BNPL) trend has seen explosive growth in recent years. From a modest USD 34 billion in global transaction value in 2019, it skyrocketed to USD 120 billion by 2021.

This remarkable surge shows no signs of slowing down. Forecasts suggest the market will reach USD 386 billion in 2024 and could hit USD 565.8 billion by 2026. In the US alone, BNPL spending is expected to grow 12.3% year-over-year to USD 80.77 billion in 2024 ^[4].

2. Popular BNPL Providers

Several key players dominate the BNPL landscape. Afterpay leads the pack, with 50% of BNPL users choosing their service. Klarna follows closely at 45%, while Affirm secures 41% of user preferences.

PayPal’s BNPL offerings collectively garner 35% of users. Other notable providers include Zip/Quad Pay and Sezzle, each capturing 11% of the market ^[5].

3. Reasons for Popularity

BNPL’s popularity stems from several factors. For 45% of users, it simplifies the payment process, making purchases more convenient. Another 44% appreciate the flexibility it offers in managing their finances.

Lower interest rates compared to traditional credit cards attract 36% of users. The easy approval process appeals to 33%, providing an alternative for those who might struggle with traditional credit. Interestingly, 33% turn to BNPL when their credit cards are maxed out, highlighting its role as a financial safety net for many consumers ^[6].

Pros & Cons of Using BNPL

Advantages for Consumers

Buy Now, Pay Later (BNPL) services offer several benefits to consumers. They provide flexibility in managing purchases, allowing shoppers to break up payments into smaller, more manageable amounts.

This is particularly helpful for larger purchases, as it doesn’t require having all the cash upfront. Most BNPL services split costs over several payments scheduled two to four weeks apart, often aligning with biweekly pay schedules.

One of the main draws is the typically interest-free financing. If payments are made on time, users can enjoy 0% financing, making it an attractive alternative to credit cards. Additionally, some BNPL services don’t perform credit checks, making them accessible to those new to credit or rebuilding their credit history ^[7].

BNPL has gained significant popularity, with the number of loans from five popular providers increasing by 970% from 2019 to 2021. Consumers appreciate the ability to pay on their own schedule and use the service for both online and in-store purchases ^[8].

Potential Risks and Drawbacks

Despite its benefits, BNPL comes with potential risks. Missing payments can result in late fees or interest charges on unpaid balances, potentially making purchases more expensive than initially planned. In some cases, accounts may be turned over to collection agencies, potentially impacting credit scores ^[9].

Frequent, automatically scheduled payments increase the risk of bank account overdrafts if users aren’t careful. It’s crucial to remember payment schedules and ensure sufficient funds are available.

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How BNPL Affects Your Credit Score

Credit Checks

Buy Now, Pay Later (BNPL) services often perform soft credit checks, which don’t impact credit scores. These checks verify identity and evaluate financial behavior without a full credit report review.

However, some BNPL providers, like Affirm for longer-term loans, use hard credit checks. These can slightly decrease credit scores, typically by no more than five points.

Payment Reporting

Traditionally, BNPL activity hasn’t been reported to credit bureaus. This means responsible use of BNPL services didn’t help build credit.

However, this is changing. Major credit bureaus like Equifax, Experian, and TransUnion are now incorporating BNPL data into credit reports. Apple Pay Later, for instance, has started reporting user account information to Experian ^[10].

Impact on Creditworthiness

The inclusion of BNPL data in credit reports could have mixed effects on creditworthiness:

1. Positive impact: On-time payments could help build a credit history, which is especially beneficial for those with limited credit.
2. Potential risks: Missed payments or defaults could negatively affect credit scores. Since payment history is a significant factor in credit scoring, this could have a substantial impact.
3. Credit utilization: High utilization could potentially lower credit scores for revolving BNPL accounts.
4. New credit inquiries: Frequent BNPL applications might be seen as a sign of financial distress, potentially affecting creditworthiness ^[11].

It’s worth noting that while BNPL data is being reported, it may take time before it’s fully incorporated into credit scoring models. The unique nature of BNPL loans, such as their short-term structure, presents challenges in traditional credit scoring methods. As the industry evolves, consumers should be aware that their BNPL usage could increasingly influence their overall credit profile ^[12].

Should You Opt For BNPL?

The Buy Now, Pay Later (BNPL) trend has a significant influence on the e-commerce landscape, offering consumers a flexible way to manage their purchases. Its rapid growth and wide adoption by major retailers highlight its appeal to shoppers seeking alternative payment options. While BNPL provides convenience and interest-free installments, users should be mindful of potential risks such as late fees and the impact on their credit scores.

As BNPL continues to evolve, its integration into credit reporting systems may have far-reaching effects on consumers’ financial profiles. This development underscores the need for responsible use and a clear understanding of the terms and conditions. With its growing popularity and ongoing changes in the financial sector, BNPL is likely to remain a key player in shaping the future of online shopping and consumer finance.

References

[1] – Bostonfed – Who Uses Buy Now Pay Later. https://www.bostonfed.org/publications/current-policy-perspectives/2024/buy-now-pay-later-who-uses-it-why.aspx

[2] – Stepchange – Buy Now Pay Later. https://www.stepchange.org/debt-info/buy-now-pay-later.aspx

[3] – Marketplace – Buy now, pay later programs — useful tool or slippery slope?  https://www.marketplace.org/2024/06/18/buy-now-pay-later-loan-debt-credit/

[4] – Statista – Global transaction value of buy now, pay later (BNPL) in e-commerce from 2019 to 2021, with forecasts from 2022 to 2028. https://www.statista.com/statistics/1311122/global-bnpl-market-value-forecast/

[5] – Scoop – Buy Now Pay Later Statistics 2024 By Payment Method. https://scoop.market.us/buy-now-pay-later-statistics/

[6] – Financial Counselling Australia – New research shows Buy Now Pay Later is not a free or low-cost option compared to traditional credit cards.  https://www.financialcounsellingaustralia.org.au/new-research-shows-buy-now-pay-later-is-not-a-free-or-low-cost-option-compared-to-traditional-credit-cards/

[7] – Ctelco – A Guide to Understanding Buy Now, Pay Later. https://www.ctelco.org/buy-now-pay-later/

[8] – Science Direct – Buy now, pay later (BNPL) …on your credit card. https://www.sciencedirect.com/science/article/pii/S2214635023000023

[9] – Bis – Buy now, pay later: a cross-country analysis. https://www.bis.org/publ/qtrpdf/r_qt2312e.pdf

[10] – Researchgate – BUY NOW-PAY LATER -TRENDS IN PURCHASE DECISIONS.
https://www.researchgate.net/publication/372448324_BUY_NOW-PAY_LATER_-TRENDS_IN_PURCHASE_DECISIONS

[11] – Consumer Council – Buy Now Pay Later Prepared on behalf of the Consumer Council Northern Ireland. https://www.consumercouncil.org.uk/sites/default/files/2023-12/Buy_Now_Pay_Later_Nov_2023_FINAL.pdf

[12] – Researchgate – “Buy Now, Pay Later” (BNPL): Optimizing Customer Targeting Decisions Using Payment Default and Product Return Option Values.
https://www.researchgate.net/publication/359795582_Buy_Now_Pay_Later_BNPL_Optimizing_Customer_Targeting_Decisions_Using_Payment_Default_and_Product_Return_Option_Values