BNPL

“BNPL” stands for “Buy Now, Pay Later”. This payment method allows consumers to acquire goods or services immediately, while covering the full cost of the purchase over a series of installments. BNPL is a popular payment method for online purchases, and is offered by specialized BNPL providers who work together with merchants. In contrast, traditional installment loans are offered by enterprises including banks and credit institutions.

BNPL payment methods are typically offered by retailers, and allow consumers to split the cost of a purchase over a series of installments, typically without incurring interest. When a consumer chooses to pay for a purchase using BNPL, the BNPL provider pays the merchant for the purchase directly while issuing a loan to the consumer. Flexible and interest-free repayments make BNPL an attractive proposition and make certain products more accessible, in particular to consumers with a limited budget. These consumers can make purchases without needing to cover the full costs up-front.

For consumers, BNPL is not that different from classical purchases on account or installment purchases. What differs between providers are the payment models and conditions. A purchase on account normally involves a payment term of 14 to 30 days, during which time the full cost of the product must be covered.

It is also possible for consumers to take on a loan to cover the costs of a purchase, which is typically offered for goods with higher costs and paid off in installments. One of the main differences between such loans and BNPL is the interest rate. BNPL plans typically do not charge interest, whereas installment purchases often have relatively low interest rates. BNPL schemes generally have shorter repayment periods and incur higher penalties for missed payments. BNPL purchases are typically concluded as follows:

1. The consumer adds goods to their shopping cart and chooses the “Buy now, pay later” option at checkout.

2. If the BNPL loan is approved, the BNPL provider covers the cost of the purchase and pays the merchant. The consumer needs to make a small down payment, e.g. 25% of the total cost, which is paid directly to the BNPL provider.

3. The remaining balance is then paid off over several interest-free installments. Repayments typically take place over several weeks or months. The amount that needs to be repaid with each installment is determined beforehand and remains constant.

In principle, any consumer can use BNPL services. Many BNPL providers try to make their services available to as wide a target group as possible, and therefore often also offer options for consumers with a poor credit rating.

Instead of performing an in-depth credit check, BNPL providers only carry out a simplified credit check. These checks are also not reported to credit agencies and thus have no effect on the consumer’s credit rating.

Some providers also use alternative methods to assess a consumer’s eligibility, such as their transaction history and sources of income in order to be able to offer their services to consumers with a limited or no credit history. This is particularly advantageous to young adults. BNPL also opens up access to credit to consumers who have had other loan applications turned down, allowing them to finance their purchases. However, this approach also brings its own risks with it.

While BNPL offers many advantages to consumers, there are also associated risks. These include potentially accumulating debts along with hidden fees, and penalties or interest on missed payments. Consumers need to be conscious of these risks and make sure they read the repayment terms and plan their expenses accordingly.

For merchants, the risks are much lower. If the consumer does not repay an installment in time, the merchant typically never knows, as the BNPL provider has already transferred the amount due to the merchant. Consumers take out the BNPL loan with the BNPL provider, not with the merchant, and the provider is responsible for remunerating the merchant. As such, the risks associated with the loan are assumed by the BNPL provider. There are however some risks for merchants:

• Reliance of a third party: With the BNPL provider acting as a middleman in the purchasing process, merchants rely on their providers being reliable and secure. Any security breaches at the BNPL provider can reflect negatively on the merchant and their business.

• Increased risk or returns: As BNPL allows consumers to try out products before they pay, the likelihood of consumers purchasing multiple items or making more frequent purchases increases, and so too does the risk of returns. This results in additional effort for merchants and increases associated costs.

Popular BNPL providers include Klarna, Afterpay, Affirm and Zip. These platforms offer various payment options and enter into partnerships with merchants in order to provide consumers with a wide range of options. Other payment providers such as PayPal also offer BNPL services that can be selected with a single click during the checkout process. For merchants, choosing the right BNPL provider depends on the type of goods they sell, the price of goods, and their customer base. Another important factor to consider is the location of the merchant’s customers. In general, the following aspects should be taken into account when choosing a BNPL provider to work with:

• Repayment conditions: BNPL providers offer different installment plans and repayment terms, ranging from a few weeks to several years. If the average order value is high, merchants should look for a provider that offers longer repayment terms, e.g. 6 months. Enterprises whose average orders are low in value can typically offer fewer installments over a shorter time period, e.g. 4 installments over a 6 week period.

• Line of credit: Every consumer has a different limit to their expenditure, which depends on their consumption, credit rating and payment history. Once again, the average value of orders matters, and merchants should choose a BNPL provider that offers a sufficient line of credit for consumers to be able to shop successfully.