How to buy now, pay later has become a $ 100 billion industry

How to buy now, pay later has become a $ 100 billion industry

Klarna logo displayed on laptop and phone screen.

Jacob Porziki | NurPhoto via Getty Images

Buy Now, Pay Later The time is ticking.

Millions of buyers now use the Buy Now, Pay Later or BNPL service to finance their purchases. And the options are more diverse than ever – Klarna, Affirm, and Afterpay are just a few of the many providers out there.

Meanwhile, big business is getting on the bandwagon, PayPal has launched its own product, Amazon and Apple have partnered with Affirm, and Square has agreed to buy Afterpay in a $ 29 billion deal.

BNPL companies offer their service as a better alternative to credit cards. But critics fear that many people are spending more than they can afford, and some may not even realize they are going into debt.

So what to buy now, pay later? And why does it suddenly explode?

What is BNPL?

BNPL plans, also known as point-of-sale loans, allow buyers to pay for their items over a period of installments.

The concept is not new. Installment plans have been around for years, known as “layaway” in the United States or “lay-by” in Australia. These agreements allow people to spread the cost of goods over a period of time.

BNPL is similar in that consumers receive the product up front and pay for it in incremental amounts, often without interest.

Buyers can choose to use BNPL service while checking out online with just a few clicks. They usually pay the first installment and bill the balance over a three to four month period.

BNPL providers often add a payment button to a retailer’s website and then deduct the merchant from each transaction. Experts say retailers are encouraged to accept it as it often leads to higher average order values ​​and better conversion rates.

Some BNPL companies also earn income from late payment fees and interest on long-term payment plans.

The advantage for buyers is that they can usually purchase an item for more than what they can afford at once – say, a $ 300 jacket – and spread the cost of their purchase into monthly installments. .

Why is it so popular?

One word: coronavirus.

Many physical retailers have been forced to shut down temporarily due to the pandemic and have seen consumers spending more time at home.

This has led to a boom in online shopping. According to a report by Worldpay, the payment processing company owned by FIS, global e-commerce transactions totaled $ 4.6 trillion last year, up 19% from 2019.

BNPL accounted for 2.1% of that amount, or about $ 97 billion. According to Worldpay, this figure is expected to double to 4.2% by 2024.

While BNPL programs were already gaining popularity before the pandemic, changing consumer spending habits and the adoption of e-commerce have resulted in significant market growth.

This has been a boon for many companies in the industry, with Klarna hitting a valuation of $ 46 billion in a recent private fundraiser, PayPal acquiring Japanese company Pedi for $ 2.7 billion and Square taking over. ‘Afterpay.

what are its dangers?

One of the main criticisms of BNPL is that it can get buyers to spend more than they can afford. Later payment plans are especially popular among Millennials and Gen Z buyers.

A consumer advocacy group in the UK said it had conducted a survey which found that nearly a quarter of BNPL users were spending more than they initially thought because the service was available.

There is also a fear of how easily people can get into debt, sometimes without even realizing it, since there is no serious credit check.

The industry has been likened to controversial payday loans that allow short-term borrowing, often at high interest rates. Although BNPL is generally interest-free, some providers charge high late fees.

BNPL providers say they have security measures in place to ensure users don’t overpay. For example, Klarna sets spending limits on a case-by-case basis.

“For each transaction, we take a new position and look at how consumers use this product,” Karlna CEO Sebastian Simiatkowski told CNBC.

“If they use it in a positive way, we can expand their ability to use it. Otherwise, we will restrict their ability to use it or use it entirely. would hamper their ability to do so.

But critics argue that BNPL needs regulations to adequately protect consumers. The UK government is trying to put the brakes on the industry with a plethora of proposals, including affordability checks for customers. A consultation on the rules is expected to be released in October.

For their part, Klarna and Clearpay – the UK arm of Afterpay – say they are in favor of the move towards regulation.

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