Buy Now, Pay Later (BNPL)

It's not every day that you come across a great deal on a pair of shoes in the market.  

You have been wanting to purchase these shoes for months - but it's the end of the month and you are short of funds.

So, how can you purchase this product if you don’t have the money?

Well, credit card comes to mind but remember that it also requires you to pay an interest when you repay the lent amount over the next few months.

Now, this is where Buy Now, Pay Later (BNPL) comes in.

BNPL is a type of short-term financing facility that allows you to make a purchase and pay for it over time.

Generally, there is no interest to be paid unlike credit cards or personal loans.

The Bank for International Settlements (BIS) published a report in December 2023 according to which BNPL activity increased more than sixfold from 2019 to 2023 globally. 

Source: BIS

Doesn’t the facility seem truly awesome?

Well, don’t get all floored as nothing truly is perfect. Like all financial instruments, BNPL has its pros and cons.

Today, we will dig deeper into what BNPL is and why you should care about it. 

What is Buy Now, Pay Later (BNPL)?

Buy Now, Pay Later (BNPL) - as its name indicates - is a short-term financing facility that allows you to make a purchase, and then pay for it later.

But how can it happen that a seller gives you a product while you haven't paid for it?

So, this is how it happens. 

• Suppose there is a pair of running shoes you want to buy but don’t have that kind of money right now.

• What you can do is check with the seller if they have a BNPL facility.

• You can then opt for a participating company that offers the BNPL service and make the payment for the purchase.

• Mostly, the service is provided by a lot of non-banking financial companies (NBFCs), but a lot of banks have increasingly gotten into this segment lately.

• Technically, you have made the complete payment for your shoes through the BNPL facility.

• But the payment has been made by the company on your behalf. You haven't paid for it out of your own pocket.

• Next, you are required to repay the amount in instalments over time as per the terms and conditions mentioned by the BNPL company.

• Generally, the instalments get deducted from your bank account or credit or debit cards and remain interest-free. 

Source: BIS

Now, you might be wondering how BNPL service providers are earning profits if the instalments their customers pay are interest-free.

Actually, it is not customers but sellers that bring revenue to the BNPL companies. Sellers and merchants partnering with these BNPL companies pay them fees as the service brings a lot of customers, even seemingly unwilling ones, to the market. 

Advantages vs. Disadvantages of BNPL

Trends

BNPL has grown in popularity globally over the years as we are increasingly becoming a credit-heavy economy. 

Source: BIS

The countries with the highest adoption rates are Australia and Sweden. 

Other countries with significant BNPL uptake are China, Finland, Germany, the Netherlands, New Zealand, Norway, Singapore, the United Kingdom and the United States.

BNPL app use surged during 2019 and 2021. Note that this is the same period as the COVID-19 pandemic which witnessed a severe economic downturn. 

Source: BIS

The trend continued well into 2023 as users got used to the ease of the service.

The majority of BNPL app users across countries are under the age of 35. Younger and tech-savvy individuals, including “Millennials” and “Generation Z”, often don’t possess credit cards and are generally less financially literate than older generations.

BNPL is popular with young, lower-income and less-educated adults. The typical profile of a BNPL user appears high-risk. 

Source: BIS

Is it a Good Time for Fintech Companies to Venture into BNPL?

BNPL offers several business models, including applications, cards and websites. The BNPL market offers fintech companies a substantial growth opportunity.

Transaction fees and interest charges are two ways that BNPL companies might generate profits.  

While we cannot know for sure what the long-term impact of BNPL will be, it is clear that BNPL is here to stay. 

Last Words

If you are considering opting for BNPL for a potential purchase in the future, keep a few things in mind.

Understand the terms and conditions in your agreement with the BNPL platform.

Make an honest assessment about your repayment capacity as you will be required to pay instalments on time; otherwise, it will incur penalty.

It is never a bad time to consider what might happen if you fail to make the repayment due to some unforeseen event. Take a close look at the related information in your agreement.

As the facility is available to youngsters will little financial knowledge and little money, BNPL has grown increasingly popular of late.

Customers get to purchase their favourite products immediately while they can pay the amount over time without any extra cost.

Sellers attract a large number of customers, even those without enough resources.

But BNPL platforms often find it difficult to record profits due to high fixed costs, high expenditure and failing credits.

Besides, BNPL can prove to be a concern to the broader financial ecosystem if the bad actors are not reined in as they pose an incredible credit risk.

The growth of BNPL will be beneficial only if the platforms emerge profitable too. So far, only the customer and sellers seem to be reigning the market.

Meanwhile, Save Now Pay Later (SNPL), an alternative model to BNPL, seems to be an emerging trend of late.

We will take a close look at SNPL soon.

Keep an eye on the BitDelta Academy to follow the latest trends in the financial markets.