Buy now, pay later

Buy now, pay later (BNPL) is an often unregulated installment plan money-lending approach which commonly involves four equal instalments spread out over a period of six weeks. Since lenders are more likely to report defaults than successful loans to credit-reporting agencies, it can put the credit rating of customers in jeopardy.[1][2]

History

Hire purchase lending, from which 'buy now, pay later' derives, was developed in the 19th century. It emerged as a way to allow consumers to purchase high-value goods (e.g. white goods) they did not have the funds to buy outright.[3] In the early 21st century, fintech companies developed systems that allowed instalment plan lending to be integrated into the payment flow of online shops, allowing a consumer to get instant credit at the point of sale, and pay for a purchase over an agreed schedule. It is this integration and instant processing that sets BNPL apart from other approaches to consumer lending.[4]

Lending process and business model

Retailers that have partnered with BNPL lenders will display the option to complete a purchase using BNPL at checkout, alongside other options such as credit/debit card. If a customer chooses to use BNPL, the lender will typically carry out a soft credit check[note 1] on the customer, and return a decision within seconds. If approved, the lender will pay the merchant, and offer the customer various options to pay for the purchase. These options could include delaying the payment for a short period of time, or spreading the full balance over several smaller payments.[6]

The service is free to the customer, assuming they make their payments as agreed. BNPL lenders take a cut from the purchase price of anything they help the merchant to sell.[6] Should a customer fall behind on payments, late fees are typically charged, and persistently delinquent accounts may be sold on to debt collection agencies.[7]

Criticism

Marketing tactics and ease of access to credit

BNPL lending has been advertised heavily on social media platforms by influencers. Social media users have reported such adverts being very persuasive in encouraging them to purchase items on BNPL credit, even items they weren't previously planning to buy. Agnes Nairn, a professor at the University of Bristol and marketing ethics researcher, has said that such ads normalise debt by making it appear "fun" and encourage overspending.[8]

Lack of regulatory oversight

Buy now, pay later (BNPL) loans generally offer consumers fewer protections than other financing options.[9]

BNPL platforms charge no interest, so they are not subject to Australia's Credit Act.[10] The Australian Finance Industry Association introduced a BNPL Code of Practice, which came into effect on 1 March 2021. The Code is voluntary so it does not have the teeth of financial regulation.[10]

See also

Notes
  1. 'Soft' credit checks do not impact a customer's credit score, in contrast to 'hard' checks which can.[5]

References
  1. Geron, Tomio (2021-10-04). "Invest now, win later: Inside the 'buy now, pay later' gold rush". Protocol — The people, power and politics of tech. Retrieved 2021-12-01.
  2. Akeredolu, Nelson; Braden, rew; Friedman, Joshua; Udis –, Laura. "Should you buy now and pay later?". Consumer Financial Protection Bureau. Retrieved 2021-12-01.
  3. Boxell, James. "How Old-Style Buy Now, Pay Later Became Trendy 'BNPL'". www.bloomberg.com. Retrieved 13 December 2021.
  4. Gerrans, Paul; Baur, Dirk G; Lavagna-Slater, Shane (21 July 2021). "Fintech and responsibility: Buy-now-pay-later arrangements". Australian Journal of Management: 3–4. doi:10.1177/03128962211032448.
  5. "What Are Inquiries On Your Credit Report?". www.experian.com. Experian. 4 May 2021. Retrieved 13 December 2021.
  6. Sheikh, Rahil (13 December 2021). "Buy now pay later: How does it work?". BBC News. Retrieved 13 December 2021.
  7. Espiner, Tom (2 September 2021). "Buy Now Pay Later: 'I'm stressed over debt'". BBC News. Retrieved 13 December 2021.
  8. de Gallier, Thea; Day, Harvey; Price, Hannah (10 February 2021). "Influencer: 'Why I stopped working with Klarna'". BBC Three. Retrieved 14 December 2021.
  9. Paul, Trina (2021-10-09). "What consumer protections do you have with 'Buy Now, Pay Later' services? Here's what you need to know". CNBC. Retrieved 2021-12-01.
  10. Derwin, Jack (3 March 2021). "'Regulation is not enough': Afterpay defends the buy now, pay later industry code of conduct, as consumer advocates slam it as toothless". Business Insider Australia.
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