The Ease and Risk of Buy Now Pay Later Plans

Buy now pay later, or “BNPL” services are growing in popularity during the pandemic as they enable consumers to pay for purchases over a short time with no interest and a small starting payment.

However, money experts urge caution. Similar to credit cards, BNPL services can negatively impact credit scores and land people in debt or collections if not used properly. A recent survey found that only 43 percent of people who have used a BNPL service understand all of the terms and conditions.

Accessing BNPL payment options just got a whole lot easier for consumers comfortable with PayPal. That online payment service last month announced a new buy now pay later installment solution of its own.

PayPal’s new “Pay in 4” program offers a short-term- four-payment installment for customers in the U.S. It is designed to help merchants drive conversion, revenue, and customer loyalty without taking on additional risk or paying any additional fees. The program also enables consumers to make a purchase and pay off their purchase with four interest-free installments.

BNPL programs have been around for a while, but they have seen a growth in popularity recently. One of the reasons is that e-commerce brands are increasingly adopting BPNL programs as a payment option, according to Ruba Aramouny, owner and strategic director of Solid Marketing.

“This helps them reach more target markets, convert more shoppers into buyers, and differentiate their webshops from the competition,” she told the E-Commerce Times.

Who Is Using BNPL?

More than one-third of consumers who use BNPL services want to avoid paying credit card interest, according to a recent survey of 1,862 people by The Ascent, a Motley Fool service that rates and reviews essential products for everyday money matters.

That study also revealed that more than one-third (38 percent) of survey respondents who have used a BNPL service wanted to make purchases that otherwise would not fit their budget. Fourteen percent said they use the service because their credit cards are maxed out.

Approximately one in five people using BNPL have missed a payment or incurred fees. The same amount thinks they will miss a payment in the next 12 months.

Respondents said they use BNPL to buy:

  • Electronics (43.65 percent)
  • Clothing or fashion items (36.95 percent)
  • Furniture or appliances (32.81 percent)
  • Household essentials (30.96 percent)
  • Groceries (22.54 percent)

PayPal Plan Details

Pay in 4, which is part of PayPal’s growing suite of Pay Later solutions, enables merchants and partners to get paid upfront while enabling customers to pay for purchases between US$30 and $600 over a six-week period. payments are seamless with automatic re-payments. Pay in 4 will also appear in the customer’s PayPal wallet, so they can manage their payments in the PayPal app.

“In today’s challenging retail and economic environment, merchants are looking for trusted ways to help drive average order values and conversion, without taking on additional costs. At the same time, consumers are looking for more flexible and responsible ways to pay, especially online,” said Doug Bland, SVP, Global Credit at PayPal.

With Pay in 4, PayPal is building on its history as the originator in the buy now, pay later space, coupled with PayPal’s trust and ubiquity, to enable a responsible and flexible way for consumers to shop while providing merchants with a tool that helps drive sales, loyalty and customer choice, he explained.

Easy Access

Aside from interest-free credit, shoppers using BNPL plans receive several advantages. With more companies offering it as a payment option, the market for BNPL payment providers is growing and becoming more competitive, noted Solid Marketing’s Aramouny. This in turn increases the advantages that shoppers receive.

For example, the early BNPL programs typically required you to go through the process of setting up an additional account with a new bank for the amount of the debt, she explained. Nowadays, BNPL is much easier to access and can simply be done by filling out an online form.

“The ease of access to these programs now makes it a popular payment method for shoppers,” she noted.

Buy now pay later has exploded in popularity over the last few years due to a confluence of factors, according to Ben Parr, co-founder and president of Octane AI. Those factors include the sudden democratization of BNPL technology by companies like Afterpay, Klarna, and Affirm.

Other factors are a rapid rise in online shopping and a growing rejection of credit cards by millennials and Gen Z. This combination has created a perfect storm for the rise of BNPL, said Parr.

“For consumers, BNPL makes new purchases less daunting. It is harder to give up $100 all at once [versus] spending just $25 upfront. Psychologically, it makes big purchases easier to complete. BNPL also opens up new payment options for those who do not have credit cards,” he told the E-Commerce Times.

Risky or Safe?

This payment option is less risky and intrusive than a typical store-brand credit card, with lots of hassles and massive fees associated with late payments or installment payments, according to Jonathan Treiber, co-founder and CEO of RevTrax.

A customer weighing the risks of a store credit card or standard association-branded credit card product against BNPL makes BNPL an easy decision, even if both carry the same weight with credit agencies and impact short-term credit ratings with a hard-inquiry. “BNPL has the same risks as any other credit products for customers who are inclined to overextend themselves,” he told the E-Commerce Times.

Buying a high-ticket item with a debit card is still the safest because the customer needs to have the cash in the bank to buy the item. Of course, consumers need the forethought to ensure they will not need that cash for something else, he added.

BNPL is a safe alternative to consumers over traditional credit and/or debit cards agreed Parr. It is very safe and widely accepted by thousands of retailers and direct-to-consumer brands.

“BNPL is well past the early adopter phase and is mainstream in many markets. It is a no-brainer for e-commerce brands to implement, and BNPL will be a major part of the future of consumer spending for a long time,” he said.

BNPL plans are merely newer versions of long-standing credit offerings, including lay-away offerings by big-box retailers. Stores encouraged customers to purchase inventory today but pay for it over time, especially around Christmas Holiday shopping periods, added Treiber.

Strong Consumer Interest

Other than interest-free credit, BNPL has strong drawing power for some categories of consumers. That was reflected in The Ascent survey.

The fact that BNPL plans are not credit cards is a big draw. People have conflicting feelings about credit cards. Even when they do not, they may not be able to get approved for one, according to Dann Albright, financial research analyst at The Ascent.

“The COVID-19 pandemic may also be playing a role. We found that over a quarter of people who lost income due to the pandemic have taken out some sort of loan. BNPL is an easy way to increase buying power without going through a credit check or asking a family member to borrow money,” he told the E-Commerce Times. “We don’t have any specific stats on the pandemic and BNPL, but based on what we’ve seen, it wouldn’t surprise me if it showed up as a factor.”

Most of the survey respondents said they use BNPL services to avoid paying credit card interest. A close second was “To make purchases that otherwise wouldn’t fit in my budget.” That is a situation in which you might expect credit cards to be popular, noted Albright.

Over a third of Americans have used a BNPL service and the programs are continually expanding, he offered. Albright expects to see a much higher percentage of users the next time The Ascent asks that question.

“Especially with big names like PayPal getting into the business,” he added.

Proceed With Caution

BNPL plans can be a good option for consumers hard-pressed for cash during the pandemic. But Albright urges caution in knowing the terms and considering other options.

“It can be a good alternative. But I’d caution people to make sure they know the terms and conditions on their BNPL, as well as to consider a credit card with an introductory zero percent APR to pay off their purchase over an even longer time without interest,” he said.

Finding out that 43 percent of people who have used a BNPL service say they completely understand the terms and conditions is a great start. Albright would prefer to see that number closer to 100 percent.

Limiting Factors

More than one-fifth of respondents to The Ascent survey said they had used BNPL to buy groceries, and almost 15 percent said they had used them to buy books, movies, music, or games.

So these services are not just for getting a new iPhone or making a big clothing purchase. It will be interesting to see how small these companies are willing to go, Albright wondered.

“Will consumers be able to BNPL a tank of gas? A cup of coffee? We will just have to wait and see, but I am excited to find out,” he quipped.

Jack M. Germain

Jack M. Germain has been an ECT News Network reporter since 2003. His main areas of focus are enterprise IT, Linux and open-source technologies. He is an esteemed reviewer of Linux distros and other open-source software. In addition, Jack extensively covers business technology and privacy issues, as well as developments in e-commerce and consumer electronics. Email Jack.

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