The Rise of Buy Now, Pay Later

By Eric Christensen, Chief Payments Officer for Digital River

How does BNPL impact consumer health and wealth building activities?

As inflation worries persist, BNPL is becoming a tool for some shoppers to try to fit higher prices into already stretched budgets. It’s not sustainable as a long-term strategy for navigating higher prices, but it could ease the financial pinch in the short term.

For consumers, BNPL could, in some cases, affect their credit score if the provider does more than a soft look up of the consumer’s credit history. Credit bureaus are adding the option to report BNPL financing to track utilization and payment history. In some cases, shoppers can request their repayment history to be shared, which is useful if they are trying to build a credit history. This is particularly useful for younger shoppers who could consider this a way to support larger loan requests in the future, such as an auto loan or even a mortgage.

BNPL is another tool to manage the budget. Generally, consumers are drawn to BNPL as a way to avoid paying interest on an item they might ordinarily use their credit card for. In that context, consumers are saving money, provided they pay their installments on time.

What will the availability of BNPL services in small retail shops like Butchers and Greengrocers mean for their business?

BNPL is popular with merchants as they are made whole quickly, and don’t take on the risk of non-payment. Research is showing that BNPL can increase conversion rates for merchants and increase average order values for online merchants. Groceries are a necessity that people will continue to buy, regardless of whether there is a BNPL option or not. Large grocery chains are already offering BNPL/financing to help stretch family budgets. Education is important in this context because BNPL is still a loan that must be repaid.

How do you think the availability of BNPL in pubs and bars will impact consumers’ financial wellbeing?

It is a financial tool, just as credit cards are a financial tool. BNPL is more or less a reboot of the old layaway programs your parents and grandparents used – with the major difference being you get your purchase now, rather than waiting to pick it up when it’s all paid off.

As with any financial tool involving debt, consumers need to keep track of their overall debt load. Responsible companies and merchants should ensure they are educating consumers about what BNPL is and what it is not. Ultimately, consumers make their own decisions, including whether to take on debt. Consumers already can put their bar tab on a credit card. If they decide to do the same with a BNPL option, they are obligated to account for it in their budget and pay it off, just as they would their credit card.

What happens when consumers default on their BNPL payments?

Consumers could face late payment charges, they might find their BNPL account frozen, and they could also be subject to debt collection. This could have an impact on their credit score. Still, the BNPL space is competitive. Some fintech companies are hoping to attract shoppers by not charging late fees at all, while others are allowing buyers some leeway to move the repayment date to mitigate negative credit payment tracking. That’s great for shoppers, but consumers should always consider BNPL as a debt obligation that should be taken seriously.

Is it possible to abuse BNPL systems?

Fraud is happening for all types of financing. Merchants using BNPL are protected in that fintech absorbs fraud for merchants if all policies are followed. Right now, governments are most concerned about making sure consumers are protected, and some of that is being driven by banks that are losing out on business now going to BNPL providers.

Regulators want BNPL providers to do affordability checks to better control who is getting this type of financing. To address growing regulatory concerns, many BNPL providers are becoming banks or partnering with banks to retain compliance.