Buy Now, Pay Whenever You Feel Like It - The Khuram Dhanani Blog
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Buy Now, Pay Whenever You Feel Like It

When you need to buy something that costs more than your budget allows, you have two options: You can save up slowly and then spend the money or you can get a credit card. However, there’s another option that has recently come on the market — buy now pay later companies — that seems to be in direct competition with credit cards and they might actually be changing the way people spend forever. Here’s how buy now pay later companies could help change the way people think about spending money.

A Major Rise

As millennial and Gen Z buyers move away from traditional credit cards, buy now, pay later purchases will become more common and higher in value. Point-of-sale (POS) financing — or “buy now, pay later” (BNPL) — witnessed a major rise as the Covid-19 outbreak spurred unprecedented levels of e-commerce spending, while credit card balances plummeted to their lowest point since 2017.

As of now, BNPL represents only a small portion of purchases made with payment cards (including credit, debit, and prepaid cards), an industry that sees roughly $8 trillion in annual spending in the US. In 2022, however, there is a possibility that things will change.

In 2021, BNPL companies saw record-breaking fundraising and transactions, including Affirm, Klarna, and Afterpay, which was recently bought by Block (aka Square). By 2025, the industry is predicted to increase 10-15 times to reach $1 trillion in annual gross sales volume.

Even big tech players are making moves in the space:

• In August 2021, Amazon joined with Affirm, allowing customers to form a payment plan for purchases over $50. Affirm has been the e-commerce giant’s only BNPL provider since November.

• According to reports, Apple and Goldman Sachs are working on a BNPL named “Apple Pay Later.”

• To enable BNPL services for in-store purchases, Google Pay has teamed with Afterpay and Klarna.

Behind The Surge

Millennials and Gen Z are driving this trend due to their credit-conscious nature, accounting for over 75% of all users of BNPL services. Consumers in this age bracket are wary of debt and hidden fees, so they are cautious to take on the interest and fees connected with credit cards.

BNPL offers flexibility to customers who want to purchase things online (usually four payments) with no interest or penalties if they pay on time, or they can purchase things at the POS with interest-bearing loans at fixed rates with fees that are known in advance.

Despite the risk of missed payments, these may still be a better option than credit cards for longer-term funding. For month-to-month financing, Klarna, for example, charges 19.99% APR and a $7 monthly missed payment fee – much less than the $25-$40 that credit card firms can charge.

In addition, users frequently choose BNPL credit since they have a better probability of being approved. Affirm’s own credit underwriting algorithm, for example, approves 20% more clients than comparable competitor offerings. Its recently launched Debit+ card features no overdraft fees (usually $35), sign-up fees, yearly fees, or late penalties, and lets users convert purchases into installment payments within 24 hours of purchase.

On the other hand, BNPL providers make money by charging shops that want to attract more customers by offering flexible payment options. This risk appears to be paying off: Klarna now has 20 million customers in the United States, with an average age of 33.

The most common use of BNPL is for smaller purchases, with an average order size of roughly $150. According to David Sykes, Head of Klarna US, this money is generally spent on clothing and cosmetics. However, in 2022, this could start to shift…

Moving Beyond Retail

Customers are already embracing BNPL solutions to finance higher-ticket purchases such as furniture and home appliances. According to an AWS poll, 43% of adults in the United States are interested in using BNPL to pay for goods and services ranging from cars to home remodeling to medical treatment. Sunbit is already moving in this direction: BNPL financing is available for vehicle parts, healthcare services, dental services, and more through this California-based startup.

Currently, when it comes to major purchases, most buyers conduct their research online before making their purchase in person. Part of this is due to the fact that using BNPL for large-ticket transactions online is still relatively new, so the level of trust is still low. It’s one thing to use a new service to finance a $150 apparel purchase, but it’s quite another to use it to finance a new car. 

At the same time, several industries are experiencing an increase in their clients making large digital transactions. During the second quarter of last year, Carvana, an online car dealer, sold 100,000 vehicles, an increase of roughly 200% over the year before. Additionally, Vroom reported that e-commerce sales have increased by 172% over last year, reaching over 18,260 units. These two companies offer direct financing on their websites  

The Journey Ahead

Due to consumers’ increasing reliance on digital channels for various transactions, and BNPL’s increasingly widespread use, it stands to reason that even larger purchases will increasingly be made using these solutions in 2022 and beyond. BNPL providers are already increasing their spending restrictions; for example, Affirm currently approves payment plans of up to $17,500.

BNPL, however, is not without risk. Consumers can still get themselves into a huge amount of debt. They might even pay their BNPL bills with credit cards, which could result in them paying the fees they were trying to avoid. According to a recent Fitch Ratings study, BNPL’s debt performance reporting is now “opaque.”

Meanwhile, payment networks and credit card issuers will either join forces with BNPL firms or develop their own in-house BNPL solutions to remain competitive. For example, Splitit and Four have partnered with Visa and Mastercard in the past. In addition, Capital One is putting its own BNPL through its paces, with more information expected later this year.

Finally, keep an eye out for more white-label BNPL providers. These companies, such as Amount, Limepay, and Pledg, assist brands in developing their own BNPL solutions, allowing them to maintain control while maintaining their branding.

Khuram Dhanani
Khuram Dhanani
Khuram Dhanani