How Purchase Now, Pay Later grew to become a $ 100 billion business


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Buy now, pay later is a moment.

Millions of shoppers are now using a Buy Now, Pay Later or BNPL service to fund their purchases. And the possibilities are more diverse than ever – Klarna, Affirm and Afterpay are just a few of the many providers in the area.

Meanwhile, big companies are jumping on the bandwagon, with PayPal launching its own product, Amazon and Apple partnering with Affirm, and Square agreeing to buy Afterpay as part of a $ 29 billion deal.

BNPL companies are promoting their service as a better alternative to credit cards. However, critics fear that many people are spending more than they can afford and that some may not even realize that they are going into debt.

What does buy now mean, pay later? And why is it suddenly booming?

What is BNPL?

BNPL plans, also known as point of sale loans, allow buyers to pay for their items over a period of time.

The concept is not new. Installment plans have been around for years, known as “layaway” in the US or “lay-by” in Australia. These agreements allow people to spread the cost of items over a period of time.

BNPL is similar in that consumers receive the product in advance and pay in incremental amounts, often interest-free.

Shoppers can use a BNPL service with just a few clicks when checking out online. As a rule, they then pay the first installment and are billed for the remaining amount over a period of three to four months.

BNPL providers often add a checkout button to a retailer’s website and then take a stake from the retailer on every transaction. Experts say that retailers have an incentive to agree as it often leads to a higher average order value and better conversion rates.

Some BNPL firms also earn income from late payment fees and interest on longer term installment plans.

The benefit for buyers is that they can buy a more expensive item than they could normally pay at once – a $ 300 jacket, for example – and spread the cost of their purchase out into monthly installments.

Why is it so popular?

One word: coronavirus.

The pandemic resulted in many brick and mortar retailers having to temporarily close and consumers spending much more time at home.

This accelerated the growth of online shopping. Global ecommerce transactions totaled $ 4.6 trillion last year, up 19% from 2019, according to a report from Worldpay, the payment processing firm owned by FIS.

BNPL accounted for 2.1% – or about $ 97 billion – of that total. According to Worldpay, this number is expected to double to 4.2% by 2024.

While BNPL plans had grown in popularity even before the pandemic, a change in consumer spending habits and increased adoption of e-commerce gave the market a significant boost.

This has been a boon to a number of companies in the industry, with Klarna reaching a valuation of $ 46 billion in a recent private fundraising round, PayPal acquiring Japanese company Payy for $ 2.7 billion, and Square Afterpay acquired.

What are the risks?

One of the main criticisms of BNPL is that it could encourage buyers to spend more than they can afford. Pay Later plans are especially popular with Millennials and Generation Z shoppers.

What ?, a UK consumer protection group, said it conducted research that found that almost a quarter of BNPL users spent more than they originally intended because the service was available.

There are also fears about how easily people can get into debt, sometimes without realizing it, as there are no tough credit checks.

The sector has been compared to controversial payday loans, which allow short-term borrowing with often high interest rates. While BNPL is typically interest-free, some providers charge high late fees.

BNPL providers claim that they have taken security precautions to ensure that users don’t spend too much. Klarna, for example, sets spending limits on a case-by-case basis.

“With every transaction we take on a new position and look at how consumers use this product,” said Sebastian Siemiatkowski, CEO of Klarna, to CNBC.

“If you use it positively, we can expand your possibilities of use. If not, we will limit your possibilities of use or stop altogether.”

However, critics argue that BNPL needs regulations to adequately protect consumers. The UK government is trying to curb the industry with a number of proposals, including customer affordability tests. A consultation on the rules is expected to be published in October.

Klarna and Clearpay – the UK branch of Afterpay – for their part, welcome the move towards regulation.