The upsides and downsides of 'Buy Now, Pay Later' payment methods

Mark Beresford, Director at Edgar, Dunn & Company (EDC): 'EDC expects to see further innovation in the BNPL market, both online and in-store, and one area where we will see new propositions will be merchant-led financing.'

‘Pay later’ shopping typically meant an interest-free period following the purchase, during which no payments were made, and no interest charged. After this interest-free period, payment was expected in full – otherwise, interest would be added from the time of the original purchase. Today, the ‘Buy Now, Pay Later’ (BNPL) market has developed, and in Europe – according to Kaleido, the research company – 30% of total ecommerce spend will be via BNPL by 2025. 

The advantages of BNPL 

There are upsides of BNPL for both shoppers and merchants. The increased prominence of millennials in the digital economy and the growth of ecommerce during the pandemic have meant that BNPL uptake has accelerated. The main advantage for the shopper is the ability to take items home right away and pay later. The option to pay no interest if payments are met on time or the entire amount is paid off by the time the loan period ends has unquestionably appealed to consumers wishing to spread their payments over a few months. This payment method is also suitable for unexpected or urgent purchases. Consumers who may be on a low income or do not have a credit card may also find BNPL an appealing option. 

Another advantage for consumers is related to returned items. A leading fashion retailer once told me that as much as 60% of their regular female customers buy several pieces of the same item of clothing in different sizes. When the consumer returns an item bought through BNPL, they may need to arrange this directly with the retailer and in accordance with its returns policy – or some BNPL providers can deal with returns via their own branded app. Until a return has been processed by the retailer, the BNPL outstanding balance will not be adjusted. 

The exact process varies by provider; nevertheless, many consumers are taking advantage of ‘trying items on at home’ to see if clothes fit before the first payment is processed. Amazon Wardrobe also has a free 7-day ‘try on’ option for its Prime customers. 

Another benefit for consumers is that when they may be struggling to make repayments, some BNPL providers will offer an option to ‘snooze’ the re-payment by up to ten days. Klarna offers this option but only once per order. 

For the merchant, BNPL lowers and removes any potential buying hesitations that the shopper may possess. Impulse purchases are more likely to happen, and the average transaction value (ATV) is frequently higher. For merchants, this will increase overall sales and can sometimes provide a new revenue stream from loan interest and late payment fees collected and shared by the BNPL provider. Financing shoppers with a BNPL option means that there is no need for a credit card that provides a merchant with branded, smoother customer checkout experience. 

Who are the BNPL providers? 

Around the globe, there is a growing list of BNPL providers, such as Affirm, AfterPay, Ant Financial, Blispay, Bread, Bundll, ClearPay, CreditClick, Divido, EasyPay, Flava, Flexi (aka Humm), Fly Now Pay Later, Hoolah, Kiva, Klarna, Laybuy, OpenPay, PayL8r, PayPal, Sezzle, Splitit, Spotii, Tymit, Zilch, and Zip. Even Mastercard and Visa have made strategic investments in the BNPL market. 

Are there only upsides to BNPL? 

The UK’s Financial Conduct Authority (FCA) regulator conducted a review of the BNPL market, published on 2 February 2021. It said that BNPL deals offered via fintech firms such as PayPal and Klarna must be covered by its rules ‘as a matter of urgency’ because of a ‘significant potential for consumer harm’. In July 2020, Edgar, Dunn & Company (EDC) asked the question ‘Are we heading for a new consumer debt crisis following the COVID-19 pandemic?’. In a pre-pandemic world, EDC saw a growth of instalment payments and BNPL payment options appearing across a wide range of retail sectors, from fashion to airline tickets. There may not charge interest or hidden fees on most transactions – on the other hand, most providers will charge a fee if a payment is late or a repayment is missed. 

Currently, a consumer using BNPL is unlikely to be subject to a ‘hard’ credit check that would leave a ‘footprint’ on their credit file. However, costs only incur if the consumer fails to make repayments on time. Some of these providers reserve the right to report defaults to credit reporting bureaus such as Experian or Equifax. The consumer’s credit score may be affected, and this could make it difficult for a customer to be approved for a personal loan or a mortgage in the future. 

Each BNPL provider sets a credit limit based on the consumer credit score, affordability, and the proprietary algorithms, meaning one customer’s credit limit might differ from the next. Therefore, the credit limit is defined per provider, not across all providers. None of the BNPL providers will know how much the consumer has borrowed elsewhere, meaning total debts across several providers can get out of control. BNPL is currently unregulated in many markets. Much of the burden falls on the consumer to keep the amount they borrow within an affordable limit. The consumer must maintain their regular instalments. 

What is the future of BNPL? 

There is no doubt, by early 2022, one year since the FCA’s review of the BNPL market, further regulatory controls will be in place in the UK that will include affordability and the systemic sustainability of the credit market. BNPL providers will have to change the way they recruit consumers and monitor their line of credit across the market. This is expected to impact who can access BNPL and how much those who use it can borrow. 

It is hard to believe that there is room for more BNPL providers to enter the market based on the aforementioned list – however, Edgar, Dunn & Company (EDC) believes that there will be a continued growth in the short term. EDC expects to see further innovation in the BNPL market, both online and in-store, and one area where we will see new propositions will be merchant-led financing. The tremendous growth of cashless payments, including the BNPL, presents a huge opportunity for fintech companies operating in the digital payment ecosystem. More providers with more consumer propositions are expected to be launched. 

This article is part of the Payment Methods Report 2021 – Latest Trends in Payment Preferences, a comprehensive overview of the payment methods in scope for 2021, as well as best practices for checkout optimisation and customer conversion by addressing digital transformation, security, and localisation.

About Mark Beresford 

Mark Beresford is a Director at Edgar, Dunn & Company (EDC) and has over 25 years of strategic consulting experience in the payments sector. He is responsible for the company’s practice working with omnichannel merchants and payment service providers across the globe. 

About Edgar, Dunn & Company 

Edgar, Dunn & Company (EDC) is an independent global payments consultancy. The company is widely regarded as a trusted adviser, providing a full range of strategy consulting services, expertise, and market insights. EDC expertise includes M&A due diligence, legal and regulatory support, fintech, mobile payments, digitalisation of retail financial services, and ecommerce.