Buy Now Pay Later: Advantages and Risks

The number of U.S. shoppers who will choose Buy Now Pay Later (BNPL) this year is expected to reach79 million, marking a 56.1% annual increase. This accounts for 36.8% of all Internet users which indicates that more than one in three online shoppers will use BNPL in 2022. And this growth is forecast to continue, with the number of BNPL users expected to reach 88.2 million in 2023, before hitting 94.4 million in 2024.

Why is this payment option so popular? Similar to the layaway plans from the past, BNPL allows customers to spread out their payments if they don’t have a credit card or the money to pay for their preferred item(s) at the time of purchase.

While BNPL was already well-known outside of the U.S., COVID-19 gave it a lift domestically since it provided cash-strapped shoppers with the option to make partial payments for goods they had purchased online or in-store. BNPL has particularly increased in popularity with Gen Z and Millennials who might not have credit cards. It is also more common with expensive purchases that are often “financed” by making payments on conventional credit cards and carrying the amount.

The rapid escalation in BNPL use has driven a surge in the market overall, including Square acquiring Afterpay and PayPal acquiring Venmo and Paidy. And BNPL options like Klarna, Affirm and others are quickly growing as well.

What does this all mean, and what are the advantages and risks of BNPL?

Appeal for Retailers

Retailers are aware of the benefits and attractiveness of BNPL to consumers. Prior to the last holiday shopping season, Target jumped on the BNPL bandwagon, joining retailers like Amazon and Walmart in offering customers this type of payment option. Target is working with Affirm and Sezzle to provide BNPL.

In a 2021 announcement, Afterpay highlighted that Le Creuset Signature Boutiques and Outlet Stores, J. Crew, Madewell, American Eagle, Aerie, Tilly’s, Morphe, Alo Yoga, Nordstrom and Nordstrom Rack were added to its list of retail partners. Customers of these merchants can spread out the cost of their purchases into four interest-free installments. Similar partnerships exist between Klarna and Simon Property Group.

Beyond trying to satisfy consumer demand, one of the key benefits for retailers is how straightforward BNPL payments are. Additionally, research has demonstrated that BNPL options boost customer loyalty and basket sizes. A BNPL option, according to RBC Capital Markets, increases retail conversion rates by 20–30% and average ticket size by 30–50%.

Risks for Consumers

Because retailers usually receive a rise in their sales volumes as a result of offering BNPL, concerns have been expressed that BNPL options are encouraging customers to live above their means. Although BNPL is enticing to consumers, there are certain associated financial risks. Only timely payments will result in interest-free installments because it is a loan. Customers will be assessed late penalties if they skip a payment or don’t make it on time. And eventually, this will have an impact on their credit. According to a Credit Karma survey, 34% of American consumers who used BNPL services missed one or more payments, and 72% of them experienced a decline in their credit score.

Additionally, shoppers cannot benefit from features like cash-back or reward points, unlike with credit card payments.

In Conclusion

BNPL has a track record of successfully furthering the interests of all parties notwithstanding the risks. In Germany, where Computop’s global headquarters are based, BNPL has been successfully functioning for decades, starting with the first mail order businesses, without having any detrimental effects on customers. Like other new payment systems and even credit cards, it merely requires sensible user usage.

Undoubtedly, BNPL is luring customers more and more, making it more and more difficult to write off this type of monthly payment option as a trend. It is expected that more retailers will start offering this payment option because of the growth of BNPL choices and consumer appeal, not only in the U.S. but also in other nations like the UK. If they don’t, they risk losing customers to those that do.