Pain Postponed

Phil Kernen

BUY NOW PAY LATER is an online payment method that’s growing in popularity. Money and investors have moved toward participating companies big and small, as they seek to stake their claim in this growing market. What’s the big deal and why is everyone excited?

Buy Now Pay Later (BNPL) allows consumers to purchase goods and pay for them in the future. Approval happens in seconds. You make a down payment, such as 25% of the total purchase, and pay off the remaining amount in a series of interest-free installments.

This isn’t new. Variations have been around for more than a century. When I was a kid, I bought a camera on layaway from the nearby Target store. I don’t remember how much it cost, but I do remember how great it felt to bring the camera home after I made the last payment. The difference now? Financial technology and new apps allow companies to aim BNPL at young people making online impulse purchases of, say, fashion items or small electronics.

Young people, it seems, dislike credit cards and the very high interest charges that banks impose when customers don’t pay off their full balance. Gen Z shoppers prefer the feeling of control they get from BNPL’s fixed payment schedules. Britain’s Financial Conduct Authority cites data showing half of BNPL users are under age 36, and the average spend on a BNPL app was recently reported to be $100.

Who’s offering these payment methods? Compared to the U.K. or Australia, there’s much less market penetration in the U.S. Pure-play companies include Affirm Holdings in the U.S., Klarna in Sweden, Afterpay in Australia and Revolut in Britain. Established companies are buying or developing their way in: PayPal bought Japan’s Paidy. Apple is teaming up with Goldman Sachs. Shopify now offers BNPL, and Visa and Mastercard are developing technology for their issuer banks.

Why is it becoming popular now? The new companies didn’t make much headway at first. Then, in 2019, Walmart switched its credit-card servicer, partly because of frustration at the slow pace of new credit approvals. Simultaneously, Walmart partnered with Affirm to offer BNPL in hopes of finding a more efficient way to extend credit and thereby increase sales.

Over the same period, online retailers were struggling with ways to turn abandoned shopping carts into completed purchases. As BNPL gained traction within Walmart, others figured BNPL could help with the abandoned cart problem. In 2021, Square announced it would acquire Afterpay and Amazon announced it would partner with Affirm to introduce BNPL for the vendors on its platform.

How does buying now and paying later differ from using a credit card?

  • Users don’t pay interest. Merchants pay a transaction fee to the BNPL company.
  • Many BNPL vendors conduct soft credit checks, the kind usually used for informational purposes that don’t affect your credit score. This leads to faster approvals than the hard credit checks lenders perform when you apply for a credit card or a mortgage. Hard credit checks affect your credit score.
  • BNPL companies aren’t just offering the technology and facilitating the transaction. They also take on the credit risk of lending to customers who use the payment method.
  • Users incur fees for missed payments. Missing multiple payments could result in an account landing with a collection agency.

A 2020 report from the Australian Securities & Investments Commission revealed that 20% of consumers were missing payments and 15% of consumers had to take out additional loans to cover their BNPL obligations. The U.K. reported similar conclusions. Buy Now Pay Later doesn’t benefit everyone involved.

Still, it’s a payment method that’s here to stay. Best to think of it as just another way to more easily separate consumers from their money.

Phil Kernen, CFA, is a portfolio manager and partner with Mitchell Capital, a financial planning and investment management firm in Leawood, Kansas. When he’s not working, Phil enjoys spending time with his family and friends, reading, hiking and riding his bike. You can connect with Phil via LinkedIn. Check out his earlier articles.

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