With the already booming phenomenon of e-Commerce, coupled with the economic repercussions of the Covid-19 pandemic, more shoppers are looking to new payment options such as Buy Now, Pay Later (BNPL) services. 

Companies such as Affirm, QuadPay, Sezzle, Klarna, and Afterpay are just a few of the BNPL options currently available. These companies allow customers to buy and payback in “interest-free installments” over a certain time period such as a few weeks or even months. 

PayPal has launched their BNPL option called Pay in 4, which makes it possible for customers to pay back a purchase in four interest-free installments. 

Why BNPL Is Popular

Doug Bland, senior vice president of global credit at PayPal, said:

“Retailers are always looking for new and trusted ways to increase sales without taking on additional risk or costs. The COVID-19 pandemic has accelerated the challenges they face, especially as we head into the holiday season. Similarly, consumers are looking for more flexible and versatile ways to pay, especially online.”

The sudden popularity of BNPL can also be attributed to the more recent economic crisis due the pandemic. The unemployment rate in the U.S. reached 10.2% in July, where it was originally at 14.7% in the middle of spring. 

Mark A. Cohen, director of retail studies at the Columbia University Graduate School of Business, believes that many consumers in the grip of the pandemic could be driven to max out their credit cards just to keep their heads above the water. Meanwhile, credit card companies have reduced many of their customers’ credit limits as they begin to lose “creditworthiness”. 

The Ascent conducted a survey of 1,800 U.S. consumers and discovered that over one-third have taken advantage of a BNPL service. About 14% that did use this service did so because their credit cards were currently maxed out. Another 14% reported that they were not eligible to get approved for a credit card. 

BNPL allows customers to shop now and purchase items they want, yet unlike layaway, they can take their purchases home now, and pay for it over a period of time.

This option can also greatly benefit struggling retailers as a way to get more customers through their door. 

The survey also found that the most popular purchases that have been used with BNPL include electronics (44%), fashion items and clothing (37%), furniture and appliances (33%), and household essentials (31%). 

The Downsides For Consumers

However enticing a smaller, interest-free payment option appears, similar to credit cards, these special payment offers are entirely dependent on customers making their payments on a timely basis. Any missed payments and customers can be facing steep penalties rather quickly. This could mean a great amount of debt in just a relatively short amount of time. 

Therefore, it is critical that consumers take the time to read the rules and conditions for these payment plans before they make a purchase. Since the BNPL option is at a relatively new stage, they are not required to reveal what these rules and conditions actually are. This can mislead consumers into believing that they are simply paying for their items over a period of time. Consumers could unknowingly default on these payment plans. 

No Such Thing As A Free Lunch

With all the benefits that BNPL offers to both struggling retailers and consumers, there are risks to consider. Retailers, for instance, could be looking at consumers that are slow to pay or who do not pay at all. This increases their cost for goods that are not paid for. For consumers, they may take an item home, but now there is a bill to worry about. It could also mean the risk of falling into “unmanageable debt” very quickly. 

Posted in Payments