You know that buy now, pay later (BNPL) has jumped the shark when even Cosmo is writing about it. After all, BNPL is basically millennials’ way of reverse engineering the layaway programs their parents grew up on.
Not only have we recently witnessed new fintechs launch their buy now, pay later technology, we’re seeing a large increase in incumbent players expand their existing services to include BNPL offerings, as well. Just yesterday, Fiserv announced its BNPL payment option in partnership with QuadPay, and today Standard Chartered partnered with Amazon to offer installment payment plans for customers in the UAE.
While each of the now dozens of BNPL schemes operate a bit differently, most allow the consumer to split up a purchase into multiple installments and repay over a set period of time without incurring interest. As with everything that seems too good to be true, however, negative externalities exist. Here’s a breakdown of the hidden (and not-so-hidden) costs:
The BNPL company
If a consumer makes a purchase and fails to pay one or more of the installments, the BNPL company is generally the one who feels the loss. To mitigate their losses, however, companies generally won’t allow customers to make repeat purchases if they default on a repayment. Not only this, most charge late fees and high interest (some charge up to 30%) to reclaim what they can.
The end consumer is always responsible for knowing the repayment arrangement. However, mistakes happen and if the buyer is unable (or forgets) to pay one of the installments, they face multiple costly consequences. As mentioned above, the consumer in default generally faces a late fee. Klarna, for example, charges $35 per month for missed payments. Additionally, while most BNPL offerings are interest-free, some charge high interest on missed payments.
Merchants have a pretty good end of the deal when it comes to BNPL. Many offerings allow them to receive the full amount of the buyer’s purchase up-front, and they are not on the hook if the buyer defaults. Some, such as Splitit, allow the merchant to choose a lower fee if they receive the payment as the consumer repays their monthly installments.
The pricing model for merchants vary. Among some of the fees that BNPL companies advertise are: up to 6% plus $0.30 per transaction, 1.5% plus $1.50 per transaction, or 3% plus $1 per transaction.
While the banks typically aren’t a party to BNPL transactions, these new payment schemes are still costing them. How? Many shoppers are using BNPL to circumvent credit cards, which charge compounding interest each month. For users that are in the habit of financing large purchases, it makes more sense to pay for the purchase over the course of four months, interest-free, than to incur credit card debt by only paying the minimum balance.