What are the Dangers of BNPL?

BNPL is a type of short-term financing, typically linked to digital payment platforms, which allows buyers to buy a product or service with partial payment and pay the remaining amount in the future, either as a lump sum or in installments. It has become increasingly popular, particularly with the younger generation. However, some are concerned about the potential hidden dangers of this form of payment.

What is BNPL?

Buy Now, Pay Later (BNPL) is a form of short-term financing enabling consumers to put down only partial payment at the point of sale and pay off the remaining balance across fixed monthly installments. These installments, more often than not, are interest-free, which has been part of the appeal for the many consumers who have adopted BNPL as a default payment method.

Why has BNPL grown in popularity?

The BNPL method of payment has become trendy in recent years, particularly in the younger generations, despite existing in some form or other for over 15 years. With credit cards falling out of fashion, millennials have adjusted their buying patterns and have shown a preference for digital payments and a lower dependence on physical cash and cards. To meet the changing consumer needs, the market has responded with increasingly more digital payment platforms and increasingly more companies and services devoted to BNPL.

In our modern world, the majority of new services are ones that can offer the consumer an increased level of convenience and accessibility. BNPL has become the latest fad due to the level of convenience it offers consumers. Especially with the digitally-focused millennial generation, BNPL markets itself as a user-friendly and low-commitment method of payment. 

The coronavirus pandemic was also a key catalyst for the growth of BNPL services with consumers becoming more dependent on e-commerce and online shopping. 

Another reason why BNPL has become popular in the younger generation is that, unlike credit cards or loans, BNPL services do not require thorough credit checks meaning that there is a wider target audience. Those who may not be eligible for a loan or line of credit, due to lacking credit history or a low credit score, can still qualify easily for BNPL services.

How does BNPL work?

BNPL works like any credit based payment in that it facilitates purchase of a product or service but allows the consumer to pay the full amount at a later date, either in installments or as a lump sum. Importantly, this ability to delay repayments does not incur interest rates. It is a common form of payment among digital platforms and consumers have the option to choose the BNPL payment method at the time of purchase.

Why do people use BNPL?

There are many perceived benefits to using BNPL. One of the major reasons why people have adopted BNPL services is that they are able to fund their purchases in a more flexible and affordable way; instead of making one big payment at the time of purchase, they can manage this payment over time by incorporating it into their monthly outgoings. 

Another reason why consumers show a preference for BNPL is for its convenience and user-friendliness. There is no denying that BNPL is a convenient and quick way to pay; consumers can buy what they want, when they want it, without the need to wait.

BNPL offers consumers the option to manage their finances in the long-run without the need to pay back expensive interest rates like they would do with credit cards or loans; for many, this is a no-brainer.

What are the potential dangers of Buy Now, Pay Later?

As BNPL becomes increasingly popular, with more and more platforms and products allowing this type of financing, its potential dangers are coming to light. 

Financial experts say that the concept of “buy now, pay later” may in fact be false advertising. In reality, these are a form of short-term installment loans and the terms can vary dramatically between companies. Although they are largely hailed as interest-free, this is not always true. 

Additionally, there is variation between these BNPL companies about whether or not they report to a credit bureau; this has the potential to impact consumer credit score. In the saturated market of BNPL products, it can be confusing for consumers, especially the target audience of a younger, less financially literate client.

It bears questioning, if BNPL services allow consumers to break down payments with no interest fees, how do the BNPL companies make their money? 

“One area of concern,” explains Rick Dent of Finger Finance, “is that the profits come from the late fees that companies charge if the consumer is unable to meet their monthly installment plan. If their business model is based around this, it implies that companies assume that some of their consumers will be unable to repay. If it is just a one-off transaction, unlike a credit card which is long-term, it argues that providers should not be lending to people who potentially cannot repay – and will they lend to these people on purpose?”

Additionally, BNPL processes can charge the merchant a fee for offering flexible payments; as a consequence, the merchants can increase the fees of their goods and services meaning that, even though consumers are benefiting from flexible payment, they are paying more for the goods or services.

One of the clear dangers of BNPL is the link to overspending. With BNPL services becoming more widely available, consumers are choosing to finance more and more of their purchases via this method. This means that they end up spending far more than they would were they to make the full payment at the point of sale. 

It can be easy to fall into the trap of an easy-to-use, interest free, credit card alternative. However, the reality is that BNPL consumers often find themselves falling into negative financial habits. For example, Credit Karma reported in September 2021 that one third of all BNPL users are behind in their BNPL payments – subsequently impacting their credit scores. This statistic was even higher when looking at the younger demographic.

Increasingly more platforms and services are enabling BNPL services, meaning that consumers can now finance things such as rent, insurance and car payments using this method of financing. The growing accessibility of BNPL means that usage is increasing at a rapid pace with many entering these types of agreements without first exploring the potential risks.