Qwick Takes: Buy-now-pay-later Is All The Rage
BY IRINA SLAV · SEPTEMBER 24, 2021
This week, Talking Biz News Deputy Editor Erica Thompson reached out to Qwoted’s community of experts to inquire about the buy-now-pay-later trend that is growing fast in popularity among retailers and financial services providers.
Check out some of the top commentary:
I’m bullish about the future of buy now pay later. These fixed installment loans are popular among consumers, especially young adults who are especially debt-conscious and less likely to have savings and credit alternatives. The sales pitch is compelling: Users can make a series of smaller payments over time (sometimes even without interest), and they get the item right away. Many see the predictability of knowing exactly how much they owe — and for how long — as an advantage over credit card debt, which carries an average interest rate over 16% and could stretch on for a very long time.
Retailers are facing immense competition in the post-COVID economy, which has amplified the need to offer payment solutions that will drive revenue and customer loyalty. An emerging demand for omnichannel BNPL is now present among B2B buyers, after the option became ubiquitous for B2C purchases. To better attract and retain B2B customers, offering a digitized BNPL solution that provides payments flexibility in the sought-after speed and security of a B2C-like experience will provide retailers a leg up. B2B buyers have long required BNPL-like solutions – such as trade credit and payment terms – for their large enterprise purchases. Now, B2B retailers must modernize those BNPL transaction experiences with digital and mobile purchasing options for B2B shoppers, or risk losing them.
We think that BNPL fintechs have the potential to start a revolution in the financial services industry, ultimately making access to credit more decentralized, democratic and inclusive. We are already seeing major credit card networks and issuers launch their own reduced- or even interest-free installment products to catch up and be able to compete with BNPLs. Particularly in Latin America, credit card issuers charge high interest rates often exceeding 50%. Healthy competition has always benefited consumers and ultimately led to lower prices and access barriers – and we believe BNPL has the potential to reduce the credit access gap if done correctly.
Buy-now-pay-later financing is popular because it makes it easy to buy something today and pay for it later without applying for a credit card or traditional installment loans, which usually have a much longer application process. You can also qualify for BNPL without a hard credit inquiry, making it particularly attractive for people with poor credit. However, just because you can qualify for BNPL doesn’t mean you should use it. Some BNPL products are marketed to consumers with subprime credit, who could easily overextend themselves financially if they aren’t careful. BNPL financing is nothing more than a regular consumer loan. The delinquency rate of consumer loans is at historic lows — 1.56% according to the latest data from the Federal Reserve. The delinquency rate on credit cards is slightly higher (1.58). So, I wouldn’t panic just yet.
Meagen Johnson, SVP of Marketing at Jane:
The pandemic caused a massive shift in spending behavior towards online shopping and e-commerce. Millennials and Gen Z in particular have wholeheartedly embraced e-commerce and are demanding payment options that are swift, simple and safe. Responding to this surge in demand, BNPL options are growing at a tremendous rate – with no signs of slowing.
The appeal for consumers is simple: BNPL offers instant gratification. It allows consumers to spend more than they can afford, often buying those higher priced items that may previously have seemed out of reach. For brands, BNPL offers a crucial value proposition: customers spend more. In addition to increasing basket size, it also reduces dropped baskets.
While BNPL is a simple and easy alternative to other payment options, consumers need to stop, pause and understand the consequences of their purchase. For example, if payments aren’t made on time, consumers may be subject to fees and interest charges.
At its core, BNPL turns purchases into a series of more affordable payments. That is often a better option than credit cards because it avoids the revolving debt trap of credit cards: BNPL comes with the discipline of paying the outstanding balance every month or twice a month, over a fairly short time, sometimes free of charge.
Now BNPL is becoming more widely available, but still is far from universal, particularly in physical store locations. That’s why we created Upgrade Card, which lets users turn every purchase into an installment plan. Upgrade Card is fairly complementary with BNPL products, and we often see our customers use BNPL for $100-300 purchases that get paid in 4 to 6 installments, and Upgrade Card for larger expenses that can be spread over 24-36 months.
I believe BNPL will continue to become more mainstream and provide a great option particularly for these medium-size $100-300 purchases.
BNPL is here to stay, bringing transparent, personalized credit without hidden fees, but there will be a shift in usage. Right now, a lot of BNPL companies are focused on online, nice-to-haves — like fashion and Peloton machines — and are only able to approve about half of customers — so it’s not really accessible to everyone. This is still better than most credit card companies, which approve 35-50% of customers, but falls short of making it a great option for everyone.
BNPL for everyday goods and services — like auto repair, dental and eyewear — will become a priority. And companies like ours make it a feasible option by using our technology to approve 9 out of 10 customers. Shifting the spend away from wants and more toward needs, and having businesses that don’t base their business models on late fees (we don’t have any!), will help mitigate the risk of excessive debt.
According to a new report, 45% of consumers have taken on more credit card debt since March 2020, with one in five owing more than $20,000 on their cards. Buy now pay later programs tempt consumers to buy things they can’t afford and will create further obstacles in getting themselves out of debt. Even if these monthly installment payments are low, the money going toward those payments is being taken away from credit card payments and indirectly adding to a consumer’s credit card debt burden. BNPL can also increase impulse purchases and make it more difficult to track overall spending.
Arjun Narayan, CEO, founder of SalesDuo:
While it appears that the benefits far outweigh the disadvantages in the BNPL model for merchants, where merchants will need to evaluate the BNPL model very closely is in the ultimate economics of it. While a credit card transaction costs merchants between 1% and 3%, BNPL could cost them 3% to 7% of the transactions. Now, Merchants have to evaluate if there is ample margin to absorb this fee, as this cannot be passed on to the consumer in the form of increased pricing as that will make the merchant less favorable to the consumers in the competitive landscape. The other concerns would be around any backlash to the merchant’s online reputation with chargebacks or any BNPL fraud, and also any poor user experience to the users on the merchant’s website if there are any technical integration challenges with the BNPL service provider. With all of this in the backdrop and given the space is rapidly evolving, it would be prudent for merchants to sign up with BNPL service providers with lower exit barriers.
Buy Now Pay Later loans aren’t going anywhere. They’re an option at many of the nation’s biggest retailers, and consumers love them. A LendingTree survey found that nearly two-thirds of folks who’ve gotten one of these loans have done so five or more times. That speaks volumes as to how much people like these loans.
There’s a lot of risk involved with these loans, however, and none are bigger than the risk of paying late. BNPL loans typically require you to pay every two weeks, which is different than the monthly payment schedule for most loans. That’s a big difference, and if you’re unaware of it, you’re setting yourself up for trouble. Just one late payment can do serious damage to your credit.