The ‘Buy Now, Pay Later’ fever is here to stay
By Gaia Lamperti
The announcement that fintech giant Square is planning to buy Australian instalment payment firm Afterpay for $29 billion is just the latest spin in the race to dominate the buy-now-pay-later (BNPL) space. The news sent Square’s stocks up 10% on Monday.
‘Buy Now, Pay Later’ programs allow customers to purchase expansive items straight away with smaller payments over time. Unlike credit cards, BNPL loans are linked to specific purchases and need to be paid off in a set number (usually four) of instalments with no or minimum interest. Generally, BNPL programs are offered through third-party financial technology companies, among which figures Afterpay, one of the pioneers in the space.
“We built our business to make the financial system more fair, accessible and inclusive,” Square Co-Founder and CEO Jack Dorsey announced regarding the deal with Afterpay. “Together, we can deliver even more compelling products and services for merchants and consumers, putting the power back in their hands.”
Other remarkable names in the BNPL industry are San Francisco-based fintech company Affirm, whose stocks rocketed over 90% after its IPO in March, Dubai-based Tabby which raised $50 million in debt financing and Klarna, now Europe’s most valuable startup at a $46 billion valuation. The craze took off with the coronavirus pandemic-driven e-commerce boom and quickly spread from region to region, now accounting for about 3% of e-commerce in the US and about 10% in Australia, according to Bloomberg Intelligence.
As per a Capital Economics report commissioned by Klarna, almost two thirds (64%) of the adults who used a BNPL service to make an online payment said it helped them manage their finances and BNPL saved an estimate of £76 million in fees in 2020 compared to spending the equivalent on credit cards.
A generational trend
Research found that it is mostly younger generations turning to BNPL services to manage their finances. According to a GoCardless survey, three-quarters of Americans plan to decrease their use of credit cards due to debt concerns and the number is significantly higher among Gen Z and Millennials, rising to 76% among 18-24 year olds and 74% among 25-40 year olds. As an alternative to credit cards, instalment payments are strongly appealing to young consumers, as GoCardless’ data shows.
Instalment companies claim they are more transparent and flexible than credit cards and so are perceived by customers who see less risk to fall into debt with BNPL models. Each firm has its own set of rules on how to protect borrowers and merchants alike, such as cutting off further purchases as soon as an instalment is missed or charging late fees for delayed payments. Some offer long-term payback; others only have short-term plans options.
Traditional institutions joining the BNPL race
But it is not only startups getting in the game, as even big names are exploring the market. PayPal Holdings Inc. rolled out its own six-weeks BNPL program, Pay in 4, last year and now Apple and giant Goldman Sachs Group Inc. are set to embrace the feature as well, paving the way for more traditional financial institutions.
The new service will let consumers pay for any Apple Pay purchase in instalments over time with Goldman Sachs as the lender for the loans to cover the service. Apple is also planning a BNPL program for the company’s devices that is set to debut in Canada this month, which will allow paying for iPhone, Mac, and iPad over 12 to 24 months.
Associated risks
The sector also faces regulatory battles, as legislators start questioning instant loans without a traditional check on the borrower’s background. According to Morgan Stanley analysis, Afterpay makes about $70 million every year on late fees, showing that customers are actually missing payments quite frequently.
Late fees could also automatically trigger bank overdraft fees as BNPL programs are often linked to consumers’ debit cards. To avoid such risk, last December, Capital One was the first major credit card company to block customers from using its cards to pay off BNPL purchases.
“Innovations in the market can bring significant benefits, but also pose potential consumer harms that need to be addressed as soon as possible,” stated a report issued by the UK’s financial regulator. “In particular, the unregulated BNPL market more than trebled in size in 2020, poses potential harms to consumers and needs to be brought within regulation to both protect consumers and ensure it is sustainable.” The study also outlined how consumers could be having multiple transactions going on across the wide offering of BNPL platforms, increasing the chances to fall into debt.
So while BNPL is continuing to receive new confirmations that seem to endorse its staying power, a lot needs to be done on the regulatory side for it to truly endure.
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