Buy-now-pay-later, or “BNPL,” is not exactly new or groundbreaking.
Back in the day, credit cards and installment plans were the most popular ways to buy items without forking out cash.
Credit cards still offer convenience and relatively easy payment schemes. Most credit cards are also accepted by stores or “merchants” worldwide.
However, owning a credit card is not easy, and the criteria for owning one are quite a few. You need to be employed and provide all the necessary employment certificates, pay slips, IDs, bank records, etc. before the bank can even issue a credit card to you. Credit card companies also impose credit limits.
Payment schemes are also very different if we compare credit cards and BNPL plans. Credit card companies allow users to pay only the interest of the amount due. This might seem convenient, but the trade-off is that your payable balance can stay with you indefinitely, as long as you pay only the “minimum.” In a BNPL option, customers will know the exact amount to be paid and the exact schedule. The upside of this is that payments usually do not carry interest.
It is often said that less-developed countries have fewer credit card holders than more developed countries. In a way, credit cards are somewhat limited to certain countries or markets. Credit cards are also prone to security breaches, and despite breakthroughs in software security, credit card fraud remains a very real threat. Another downside of credit cards is that you need to pay a yearly membership fee, even if you are not using your card.
Another BNPL option is an installment plan that is usually in-store. But much like credit cards, it is not very easy to avail of installment plans. Many installment plans also have high-interest rates, and in case you fail to pay your monthly due, a hefty fine (or interest) is placed on top of the principal you have to pay. Often, these installment plans are backed by commercial banks.
Debit cards are also becoming popular, but strictly speaking, they cannot be classified as BNPL because a debit card already has preloaded cash. Debit cards are, however, useful because they are often used to “fund” your digital wallet, and thus facilitate your BNPL payments.
BNPL and e-commerce
E-commerce companies are now starting to realize that the more consumers they attract, the greater the demand for more flexible and somewhat novel payment options. Apparently, more online customers are now turning their gaze toward BNPL options for their online purchases.
One market study says more than 75 percent of online customers are likely to purchase if they are given other options or payment plans. Another study seems to support this trend, citing that as much as 85 percent of shoppers prefer a BNPL option if it is interest-free.
Industry experts will always say that every market (or every country) may have differences or nuances when it comes to e-commerce and that the level of acceptance of BNPL may vary; some countries may have only slight differences when it comes to BNPL, while for other countries, these differences may be vast.
In this piece, we take a few insights on BNPL, particularly the advantages and disadvantages of this option, as well as trends. We will also try to take a look if indeed, online consumers are ready for this payment option.
How does BNPL work?
Most of us might have experienced this: We see something that we like and have to decide to buy it, whether the item is on a physical store shelf or advertised online. However, the price of the item might be a bit expensive, so we back off and do a bit of thinking. Do I splurge right now and buy it, or do I avail of an installment plan so that the high cost will be spread over a few months?
Here is where BNPL comes in, as this option makes the purchasing decision a bit easier.
BNPL allows the customer to immediately order the item he or she wants and choose several pay-later options. There might be payment options for 36, 24, 12 months, 6 months, and even 3 months, depending on the online platform. The platform also takes care of the computation and the interest rates. In essence, most online marketplaces take the guesswork out of the installment plans for added convenience.
In most e-commerce platforms, the first monthly payment is the payment required. Installment payments are often on a set schedule. Credit card payments will still be accepted, but for most online platforms, an e-wallet is needed so that you can avail of the BNPL.
The process is pretty straightforward. The online marketplace will give you a list of apps that you can use to avail of the BNPL. Once you select an app, you must register and create an account. Through the app, you can then apply for a loan and the loan amount will go straight to the e-wallet, which you will then use for the BNPL purchase. Like any other loan, you will need to provide copies of your valid IDs.
BNPL, like credit cards and credit loans, also impose penalties or fees, but these charges are often lower than the usual rates.
Advantages of BNPL
It is perhaps safe to say that today’s e-commerce companies cannot hope to compete and remain afloat if they do not have a BNPL payment option. Here we list some of the major advantages of BNPL for both e-commerce companies and retailers, and why this option is proving to be very attractive for online buyers.
- BNPL is more convenient.
Customers need not worry about shelling out cash upfront if they need to purchase an item online. Although there are quite a few steps to avail of BNPL, once you’ve signed up and become familiar with the steps, it becomes easy to get installment options. More importantly, approval for a BNPL is almost instantaneous.
BNPL also allows customers to plan their purchases, and in most e-commerce sites or online marketplaces, customers are allowed to purchase items in advance. As mentioned, you just need to select the app you will use for your “loan” and e-wallet. Fortunately, all the necessary steps to take, as well as links to the apps for BNPL, are all found on e-commerce sites.
In most online marketplaces, customers do not need a credit card to avail of the BNPL option. Speaking of credit cards, one industry trend that has been highlighted is that the younger generation is seen moving away from credit cards and choosing instead to use BNPL options. One major reason is that credit cards require some sort of maintenance, such as membership fees.
Looking at the bigger picture, it would seem that using BNPL is a little less complicated than using a credit card, particularly when it comes to managing debts. A recent study pointed out that in the United States, “increased financial stress, lack of responsiveness, and misaligned terms and rewards” caused a sharply declining customer satisfaction for credit card companies.
- BNPL reduces cart abandonment
Cart abandonment is one of the major challenges for e-commerce businesses and online retailers. Simply put, online customers often leave or abandon their shopping carts before checking out, thus no sale is generated.
Interestingly, an industry study revealed that BNPL can reduce cart abandonment by as much as 35 percent. The industry study seems to point out there is some psychology involved in BNPL: customers do not see or consider how expensive the contents of their carts are because a buy-now-pay-later is there as an option. Thus, it is more likely that the online customers will proceed and complete the sale.
- BNPL can make e-commerce businesses more competitive
Overall, having a BNPL option can make e-commerce more competitive. An e-commerce business simply cannot ignore a BNPL option, especially if customers demand it. Speaking of customers, they tend to complete their purchases if there is a BNPL option. This will result in more sales for the e-commerce business. When it comes to e-commerce, “conversion rates” are a major metric. BNPL is said to increase conversion rates to up to 30 percent.
Another competitive advantage of a BNPL option is that it is said to increase the value of a customer’s purchase, meaning customers tend to buy more if the payment options are attractive to them. Industry reports say this increase in customer purchase value may range from 15 percent to a whopping 85 percent, depending on the market. The reason is that customers tend to feel more comfortable spending if they see that they can spread out their payments, instead of that “one-time, big-time” splurge.
Disadvantages of BNPL
Now that we’ve discussed the major advantages of BNPL, let’s take a look at the other side and discuss the possible disadvantages of this payment option.
- Risks and impulse buying
There will always be risks when it comes to BNPL options for both the buyer and seller. For the seller, the risk is nonpayment, because a BNPL option is basically an unsecured loan. In banking, unsecured loans will include loans that do not come with collateral. Thus, the risk for e-commerce companies is that customers may simply not pay, have delayed payments, etc.
The risk for the customers or online buyers is that since BNPL only requires you to shell out a small amount of money relative to the whole price of the item, you might be prone to impulse buying. Imagine this: Through a BNPL option, the item you bought is already in your hands even if you haven’t completed its payment.
Maybe the biggest issue with BNPL platforms is that they could be regarded as encouraging impulse spending. Online customers thus need to be extra careful and make sure of their purchases.
To address this, the seller should exert some effort to educate or remind online buyers about the risks of BNPL and not to overspend. On the side of the customer, he or she should always have the discipline to restrain from overspending, and keep track of payments or run the risk of falling into a debt trap.
- Fees and lack of rewards
BNPL provides a customer with a schedule of payments that are rigidly followed. If the payment schedule is not followed, penalties or fees are imposed and added to the amount to be paid.
Unfortunately, customers do not have any control of this schedule, thus, careful management or tracking of payments is essential on the side of the customer.
The onus is on the customer to carefully study the BNPL option before making that purchase. Last, unlike credit cards, most BNPL options also do not have rewards or cashback promotions.
Is the market ready?
To summarize, buy-now-pay-later (BNPL) options are expected to become more popular as an easier way for customers wanting to purchase items without shelling out a huge amount of cash upfront.
BNPL, compared to other pay-later options, is also seen as a more accessible option, and depending on the e-commerce website or online retailer, requirements are not too difficult to meet.
However, many markets or countries still prefer cash on delivery, and payment through digital wallets. An industry report noted this might be true in Asia, where mobile payments and digital wallets still dominate payment methods.
The report also said that BNPL in the region will only account for up to two percent of payment methods by value in the region by 2025, which is up from one percent in 2021. Europe is expected to see BNPL hit 12 percent, and North America, nine percent.
So the answer to the question “Is the market ready for buy-now-pay-later options?” seems to be a resounding “Yes,” as current payment methods are not going away any time soon.