The consumer credit market has seen its fair share of disruptions arising from innovative ideas targeting consumer experience and convenience. For instance, over the last decade, the UK has seen the rise to prominence of a new consumer credit business model known as ‘Buy Now Pay Later’ (BNPL).
Buy now pay later providers such as Klarna, Laybuy, ClearPay, and Paypal Credit strike partnership deals with retailers to give consumers access to upfront credit to help them complete their purchases. Repayment of the credit advanced can either be staggered in fixed instalments over an agreed-upon duration or settled in a one-off payment at a later date.
How Does Buy Now, Pay Later Finance Work?
A 2020 report by Worldpay, puts the annual rate of growth of buy now pay later in the UK at 39%. Another report by Capital Economics, a leading independent consultancy revealed that one-fifth of the adult population in the UK (10 million people) used ‘buy now pay later’ as an option to help them complete their purchases in 2020. Further, the report noted that nearly 4% of all 2020 retail sales in the UK were made via the buy now pay later payment model.
Before delving into the pros and cons of the BNPL model, there’s a need to understand how this payment method works. Here is a quick stepwise summary to help you wrap your head around it.
- Step 1: The consumer shops for an item online and proceeds to checkout
- Step 2: At checkout, the merchant displays the accepted payment options including ‘buy now pay later’
- Step 3: The consumer either signs up or logs onto their BNPL provider platform
- Step 4: The BNPL provider assesses the credit risk of the consumer and conducts other Know Your Customer (KYC) procedures.
- Step 5: If satisfied, the provider approves the credit
- Step 6: The product is then delivered by the merchant to the customer
- Step 7: At agreed-upon dates, the consumer makes payments to their buy now, pay later provider.
Klarna’s “pay in 3” offer means the cost of your purchase is divided into three payments that are made every 30 days – the first payment at the time of purchase and the final payment 60 days later. There is no interest or fees to pay. So it’s a good alternative to a short term loan or a credit card.
What Are The Pros of Buy Now Pay Later Finance?
The BNPL option confers significant benefits both to consumers and merchants. Here is a quick overview of the benefits consumers should expect when using it.
- Instant access to credit: buy now pay later is classified as a ‘during purchase’ payment option. It ensures consumers have the best shopping experience by giving them instant access to credit at the point of purchase. Some providers can get you approved in less than a minute. Compared to mainstream credit providers and high street banks, BNPL is a big win for the consumer.
- Ease of use: buy now, pay later solutions are powered by highly customised and targeted technology that enables consumers to interact frictionlessly with the platforms. For instance, Klarna has a QR code that consumers can scan to make a payment. Other providers combine the power of Unified Payments Interface (UPI) to simply purchase transactions.
- Staggered Payment Arrangements: The heart of the buy now pay later concept is the offering of credit to consumers and having them pay later either with a one-off payment or in instalments. This enables consumers to make purchases even if they do not have money now. Also, instalment payments help consumers to organise their finances as they smooth consumption over the desired period.
- Low to zero cost of credit: buy now pay later credit is normally fee-free and interest-free. As long as you don’t miss a payment, this option is good for you. Many of these providers make their money from the commission they charge merchants. For instance, LayBuy charges merchants a 4.75% fee and zero fees to consumers.
- Suitable for bad credit consumers: Consumers with poor credit scores can benefit from BNPL payment facilitation because these fintechs don’t always do hard credit searches. They normally conduct soft searches which do not have an impact on your credit score.
- Boost your credit rating: If you use buy now pay later responsibly, meaning that you borrow what you can afford to repay and make timely payments, your credit score can be enhanced. However, this only happens if the BNPL provider reports to credit bureaus.
What Are The Cons of Buy Now Pay Later Finance?
Well, almost everything that exists has its pros and cons and this applies to buy now pay later credit as well. Despite the many pros listed above, buy now pay later has a number of disadvantages that you must watch out for.
- Fees for missed payments: If you play by the book, the use of buy now, pay later means you won’t be charged any fees. However, if you delay in your instalments, you could trigger fees and penalties. For instance, Klarna charges a fee of £15 for every delayed instalment for order values above £200. ClearPay has put a late payment fee ceiling of 25% of the total order value.
- Negative impact on credit score: If you delay making payments, the credit provider may report your behaviour to the credit reference bureaus. This will hurt your credit rating and could jeopardise your chances of getting approved for other forms of credit in future. If you feel you cannot afford a purchase, don’t take credit for it.
- Impulse buying: Unless you have good financial discipline, buy now pay later can make you splurge or engage in impulse buying. The comfort of knowing that you can pay later (30 days to 36 months) creates an illusion that you can afford almost anything. This may push you deep into debt. Some of the items frequently purchased such as health and beauty products, electrical items, and clothing may look like small-ticket items, but their cost can quickly add up.
- High-Interest rates: Some BNPL firms such as Klarna have credit options available to customers at checkout. These financing options give customers a revolving account similar to a credit card arrangement. The Annual Percentage Rate (APR) for these financing options tend to be high, about 19.99%
Is Buy Now, Pay Later finance regulated by the FCA?
In the United Kingdom, the Financial Conduct Authority (FCA) is the body mandated with the regulation of financial firms and services. However, BNPL providers are currently not regulated by FCA.
Having said that, there is a push by the regulatory body to have such credit offerings covered by its rules. The argument is that billions of pounds are lent to consumers through unregulated transactions thereby putting them at risk of plunging into financial difficulty. The FCA believes that it is easy to build up unseen debts of £1000 or more.
Under the proposed regulatory framework, BNPL providers will be required to conduct hard credit checks on consumers in addition to affordability tests before extending credit. All this is aimed at cushioning financially vulnerable consumers against insecure and unsustainable debt offerings.
The buy now, pay later industry has witnessed tremendously rapid growth with firms such as ClearPay, Klarna, Affirm and Laybuy taking the centre stage. The credit extended with this type of product now stands at £2.7 billion in the UK alone. The advantages of instant credit, deferred payment arrangements, and low to zero cost credit have made BNPL very appealing. With that being said, consumers must be careful not to take debt they cannot afford. In the meantime, the FCA is looking to put in place a raft of measures to ensure that buy now pay later activities are brought under its wings and that consumers are sufficiently protected.
Amanda Gillam is Solution Loans's General Manager and has been since 2009. She is also a prolific writer on personal finance issues, and has been quoted numerous times in articles published on 3rd party websites and in press releases. Her...Read about Amanda Gillam
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