Ideas: The rise of buy now, pay later

If you’re one of the 87 per cent of Britons who has shopped online recently, chances are you have come across a payment option that offers the chance to buy now and pay later (BNPL). While buying via credit is not a new concept, its popularity has exploded in recent years as it has been pushed as a manageable, no-hassle option for shoppers. Now, a growing number of retailers offer BNPL services through providers like Klarna, ClearPay, Openpay, and PayPal Credit, or have developed their own offering. However, there are many experts that have expressed concerns about this increase in credit-based finance and have called for additional scrutiny and regulation of the BNPL sector.

Buy now, pay later is a method of payment where goods are initially purchased on credit, which is then repaid within an interest-free period or through pre-arranged instalments.

These options can be appealing as they make payment more manageable and can free up cash flow for the customer.

It’s not a new type of payment —retailers have offered financing options for their products for many decades. However, third-party buy now, pay later providers that specialise in zero interest credit, like Klarna and ClearPay, have become popular in recent times, especially with a younger audience.

This means that when someone refers to BNPL, it’s likely they’re talking about one of these companies.

Buy now, pay later allows the buyer to spread the cost of a product.

Essentially, this works by having the credit provider covering the cost for the item, rather than the buyer paying up-front, after which the buyer repays the credit provider back over a period of time. This allows the cost to be spread.

The vast majority of buy now, pay later providers advertise their services as interest and fee-free, so, as long as the sum is paid back on time it won’t cost the buyer anything extra.

This is one of the main advantages of these arrangements for shoppers looking to spread the cost without overpaying like they would with traditional credit.

However, interest and fees can still be charged should a buyer fail to repay on time, so caution and careful planning is still required.

Repayment can come in a number of forms.

Namely, paying in instalments with the total of the purchase split into equal payments, paying later where the payment is delayed for a set period of time and paying on finance where a payment plan is agreed upfront with a credit check normally required before the agreement is finalised.

Buy now, pay later payments have a slightly complicated relationship with credit records. However, generally speaking, provided payments are made on time, most BNPL providers don’t add to their customers’ credit records.

Most firms will also only conduct a soft credit check to confirm essential details when credit is taken out with them, which is not recorded like a full credit check.

If, however, a shopper misses a scheduled repayment or fails to repay the full amount by the agreed date, then many BNPL providers reserve the right to pursue action that can impact credit.

Fees and added interest can be the first stage past this point, but a provider may escalate the issue to debt collection agencies. Most BNPL firms say they only do this as a last resort.

Buy now, pay later payment options have certainly surged in popularity over recent years. In 2020, it was the fastest-growing online payment method in the UK, with £9.6 billion spent through BNPL providers.

One of the biggest factors in its rise in the last year has been the COVID-19 pandemic and how it has impacted the way people have shopped.

Many people have been more cautious with their spending during the pandemic as a result of the challenging economy and financial instability, so using BNPL likely presented a good opportunity to ease any cash flow worries.

In addition, the closure of brick-and-mortar stores has forced people to spend more time online, where BNPL options have been heavily advertised and made available.

We’ve also seen some operators pair with celebrities to push their services on social media, as well as partnerships with retailers who have advertised the availability of BNPL as a payment option to their customer base.

Targeting the likes of Instagram and YouTube has helped publicise BNPL with younger audiences, who may need extra flexibility in their finances.

Overall, buy now, pay later really is a topic that divides opinion.

Many people see it as a great way to offer an extra degree of affordability and flexibility to shoppers, while others see it as a way of getting into debt that is way too accessible for the unprepared.