The “Buy Now, Pay Later” (BNPL) scheme has been the hottest trend in Fintech since last August this year as several e-commerce and banks have intentions to apply it as one of the payment methods. Currently, many luxury brands such as Hugo Boss, Emporio Armani have rapidly caught the new Fintech trend and offer another payment solution: Buy Now Pay Later. It allows customers to receive items first then pay in installments with no interest. Considered as a sub-niche of credit cards, BNPL witnessed a significant increase in use during the COVID-19 pandemic. The global sales using Buy Now Pay Later as a payment method accounted for $93 billion last year and the figures for 2022 are predicted to hit $181 billion, according to Bloomberg Intelligence. The fast growth of BNPL can be easily explained since this kind of payment offers customers a better way to manage their budget with interest-free installment. Especially in the COVID-19 pandemic, many people are suffering from staff cutbacks, so breaking expenditure into smaller pieces with BNPL seems to be useful. Additionally, BNPL is labeled as the future of Gen Z and Millennials finance, which are young people under 30s with tight budgets and huge demands on shopping. Now, let’s take a closer look at Buy Now, Pay Later platforms.
1. What is Buy Now, Pay Later?
BNPL is not the new term as it actually appeared in the 90s with the name of “installment plan”. In the past, this kind of payment was usually applied with big-budget items such as furniture, pianos, etc and customers had to pay off purchases weekly or monthly. Singer Sewing Machines has laid the background for installment plans when its products were sold for “dollar down, dollar a week”. However, the “installment plan” payment method is widely used due to the rise of motors and cars in the 20th century. After that, credit cards are introduced as a great solution for customers when they want to delay payment on smaller purchases.
The concept of BNPL now is quite similar to the installment plan but it has some differences. In the past, goods that applied installment plans were big-ticket items, while BNPL now is used to pay for smaller products such as fashion items, smartphones that customers can pay off in a few weeks or months. For example, youngsters who don’t have enough money to buy a $1000 Hugo Boss pant can use the BNPL method payment for 3-6 months in installments with no interest. Fashion brands usually give shoppers several choices of installment terms with different payment apps (Klarna, Laybuy, etc). Therein, BNPL attracts Gen Z and Millennials the most since many young people don’t have credit cards while the registration process of BNPL is extremely easy. Consequently, young customers who prioritize convenience will find BNPL more attractive than credit cards.
2. Advantages of Buy Now, Pay Later
a. Convenient and easy to use
Setting up a BNPL account is simple and charges no cost. When creating a credit card, users need to do credit checks while BNPL providers only require basic personal information and account that they will deduct payments. Here are the steps of setting up a BNPL account:
- Set up a user name and security password
- Provide phone numbers or emails
- Enter the verification code sent to phone number or emails
- Enter basic information such as name and date of birth
- Enter your bank account information that you integrated with the BNPL account
Since Buy Now Pay Later platforms are integrated with the online store’s checkout, customers just need to create an account, pick up goods and choose a payment plan. Then, the store will send the payment plan to the customer’s email and once the transaction is successfully recorded in systems, installment payment will be automatic, so customers don’t have to worry about late payment. Currently, BNPL providers such as Klarna and Afterpay are not only available in the online store but also offline store, providing convenience for customers.
b. Better money management
In this covid-19 pandemic, as many people have been jobless for over a year, having expenditure control is important. With Buy Now, Pay Later, customers can spread the cost and ease the financial burden. Instead of spending a large amount of money on an expenditure immediately such as an expensive laptop, customers can break it into smaller payments and have enough budget for other expenses. Moreover, BNPL also provides flexibility in installment terms. With this kind of payment, customers have a minimum amount of money to pay back each month. However, they can pay it at once when having enough money or just pay the minimum fees if they need more time.
c. No interest cost
One of the biggest pros of BNPL is the interest-free term. Most BNPL platforms don't require interest fees in the first 56 days (4 payments over 8 weeks), then after the interest-free period, the interest is required based on different BNPL platforms. For example, Zip offers up to 60 days interest-free, then charges $6 each month as an interest fee. So, for small-ticket items that can be paid in 6-8 weeks, BNPL is a suitable choice since it costs no interest fees in about a 3-month period.
3. Disadvantages of Buy Now, Pay Later
a. Encourage impulse spending
Encouraging impulse spending is the noticeable issue of Buy Now, Pay Later. The concept of BNPL creates the feeling that spending isn’t real. It makes customers think that buying a $30 dress in a 3 months installment seems to be cheaper than buying it at once. Fitch Ratings have written that small-ticket BNPL can make consumers take up the credit from a purchase that they have refrained from buying it. BNPL platforms encourage potential customers to do credit shopping instead of window shopping.
Currently, most BNPL platforms don’t have reward programs, except Klarna, which offers a reward club. With each $1 spent, you receive 1 vibe points that can be exchanged with gift cards, vouchers, etc. However, other payment methods such as credit cards offer a variety of reward programs, for example, cashback, point cards used in different services (travel, shopping), or gift cards. Since BNPL is getting attention currently, its systems and functionalities are not completed compared to other payment methods.
4. Final thoughts
The Buy Now, Pay Later scheme has just been raised again, so it is definitely not completed as other payment methods. However, it has huge potential with several advantages for both customers and retailers. BNPL is expected to be universally used in the future.
If you are ever wondering about jumping into the Fintech area by building and developing a BNPL platform, please feel free to contact us for more information. We, SotaTek, are one of the trusted service providers for top Fintech companies 2021. With the best Fintech software developers, we are confident to provide you with various Fintech Software Development Services and Web& Mobile App Development Services to build your own BNPL platform with a friendly UI design and various functionalities.