What is buy now pay later?
BNPL, or “buy now, pay later”
“Buy now, pay later” (or BNPL, as the cool kids say) services are becoming more and more popular at checkouts all over your favourite websites. BNPL is taking younger generations by storm, but how is this different to using a credit card or layby?
BNPL has quickly become the payment method of choice for many younger adults, with recently released figures from NZ Post showing 77 percent of BNPL customers are under 45 and reporting 105 percent year-on-year growth.
BNPL schemes are exactly what they sound like: services that allow you to break up payments on items in monthly or biweekly instalments so you’re not dropping a lot of cash at once. But with anything financial, there’s a lot of fine print.
Wise use of BNPL services like LayBuy, Oxipay, PartPay and AfterPay can help smooth out your spending, so long as you don't buy more than you can afford.
How BNPL works
BNPL is just an instalment payment service that enables consumers to buy products on a 'buy now, receive now, pay later' basis.
- You can't cancel the sale once you make the first payment — you have legally bought the goods.
- Payments are locked in, usually weekly or fortnightly. If you miss a payment, penalty fees apply.
- You can return faulty goods and get a refund on your payments to date — or get repairs or a replacement.
How BNPL companies make money
Late fees and interest of course!
Most of their money comes from charging retailer’s transaction fees on every BNPL purchase. Basically, they get a cut from each customer’s cart. There’s some crafty psychology at play here – they know that shoppers are more likely to buy more if they don’t have to pay full price instantly. The more customers buy, the better business goes for both the seller and the BNPL company. So, stores pay them for the promise of impulsive repeat customers who get hooked on getting cool stuff for less money up front.
Some merchants might pass on the BNPL fee to customers too. Think of this as like a credit card transaction or convenience fee.
The biggest fishhook for BNPL customers is that the providers hammer customers with late fees, especially customers who might lose track of multiple purchases. Over the short term, this will quickly add up to be more than the high interest rates on a credit card.
BNPL is still a type of short-term debt. Like all debt, there are risks, including:
- Spending more than you expect, especially if you find it hard to resist temptation when shopping,
- No longer being able to afford payments if your life changes, e.g. job loss or rent hike, and
- Missing payments costs extra in fees — making your item more expensive — and will affect your credit rating.
Before agreeing to BNPL, ask yourself if you are good at tracking your spending and keeping up to date with payments.
Spacing out payments can be a relief to you and your wallet at first, and those companies that run on a bi-weekly schedule can also line up with when you get paid (if you happen to be on biweekly pay periods, that is). This means you won’t take as much of a hit because it’ll be offset a bit by your paydays.
With time, BNPL service providers are likely to add more supplementary features – such as loyalty programs and savings accounts.
Why BNPL instead of a credit card?
Strangely, credit cards are the reason these services are growing in popularity. Many younger adults have grown up terrified of ‘bad debt’ and horror stories of out of control credit card interest.
Used with discipline, we’ve always said that a credit card can offer plenty of benefits such as reward points or cashback, complimentary travel insurance, safety, and a healthy interest-free period.
That said, a clear benefit of BNPL services is that there is usually no credit check! Not all BNPL providers report default payments to credit bureaus, as will happen if you start getting behind on spiralling credit card debt. Currently, BNPL services are not captured by the Credit Contracts and Consumer Finance Act (CCCFA), which is designed to protect the interests of consumers. So far, NZ and overseas regulators have passively watched the emergence of BNPL schemes. This means that the big banks have watched the rise of BNPL jealously, and may soon launch their own versions, perhaps hybrids with a credit card.
The bottom line - buy now, pay later
Remember: BNPL doesn’t make any goods and services cheaper. You pay the same price, just spread out over time, or perhaps the same amount with a small surcharge passed on by the merchant.