Buy Now, Pay Later: Intelligent Or Insidious?

Imagine buying an iPhone or a pair of new sneakers, but paying a quarter of the price for it upfront. You then pay the rest of in interest-free instalments. Sound good to you?

It certainly sounds good to many other people too. Buy now, pay later (BNPL) solutions, which allow consumers to pay in interest-free instalments, are continuing to grow in popularity as people seek alternative methods of financing – a trend exacerbated by the coronavirus pandemic.

BNPL has taken developed economies by storm: a Reuters poll has indicated that 42 percent of US consumers have used the service before. In the UK, the BNPL market is worth £2.7 billion, with 5 million Britons using such products since the start of the pandemic.

In Asia, BNPL is just starting to proliferate. Players like Split, Atome, Grab, and Razer are all vying for a slice of the BNPL pie. BNPL providers offer a different proposition to credit by working with the merchant, instead of charging the consumer. They can offer longer loan tenures that can extend to up to 12 months, owing to differences in salary schedules and the generally lower costs of living in these markets.

A BOON FOR MERCHANTS?

With cash tighter now for many consumers, it’s only natural that BNPL services have taken off. But unlike credit cards, BNPL providers don’t charge or punish consumers. Instead, they work with merchants to offer consumers an instalment option at checkout. Similar to credit cards, they charge the merchant, rather than the consumer, a processing fee.

This business model is similar to invoice factoring, where providers ‘buy’ the invoices for a percentage of their total value and then take responsibility for collecting the invoice payments. But BNPL providers also use fintech to make payments easier and expedite collections.