Everything comes at a price, whether you pay it right now or later!
Imagine window shopping on a designer clothing website late at night while sipping your favorite wine. Suddenly, you spot the coolest new pair of kicks, and you just cannot let them go. What’s worse, there’s only one pair left in your size, so you can’t afford to save up for them before making a timely purchase. What do you do? You use AfterPay, of course!
AfterPay, much like other financial services companies like Klarna, Clearpay and Splitit, is a buy now, pay later (BPNL) service. A BPNL service, also called a point-of-sale loan, is a short-term financing solution that allows people to buy products and pay for them at a later date. Let’s take a look at how BPNL works and the pros and cons of using this model of payment for your business.
How do BPNL services function?
When a customer uses the BPNL service, they are allowed to pay for a product in installments. Once they avail the service, they need to pay a certain amount of money upfront and can pay the rest over time. On average, the period of time in which the customer has to pay the installments ranges between 30 days to 36 months. BPNL service providers often don’t charge any interest on these installments and are easier to get approved for than a traditional credit card.
Most BPNL providers charge a fee if the installment is not paid on the designated date, and these fees can accumulate to large sums if left unpaid. While these services are interest-free for customers, they do charge the merchants a cut on BPNL purchases. Popular platforms, like Klarna and Afterpay, charge a cut of 5-6% of the purchase cost from retailers.
Positives of the BPNL model
Probably the biggest plus point of this model is that it allows businesses to get more sales. Customers tend to feel at ease with spending more money when it isn’t immediately being taken out of their accounts but instead spread over a period of time. This helps increase the total order value, and in turn helps the business grow.
Ensures steady cash flow
Another benefit of using this service is that it speeds up the payment process. Although the customer gets to pay in regular installments, the merchants do receive their full payments almost immediately. Unlike a traditional equated monthly installment (EMI) service that e-commerce companies usually have on their platforms, using BPNL ensures that your money isn’t stuck with the customer.
Reach more customers
By offering BPNL as a payment option for your business, you maintain your competitive position against other brands. Offering BPNL encourages those who might have been previously hesitant to buy from you to purchase without the stress of paying upfront.
The issues with the BPNL model
BPNL services typically end up being more expensive for the merchant than other credit services they might offer. As we already mentioned, the merchant has to pay a certain fee on every purchase made using it. Besides the cut they have to pay on purchases, the merchant might also have to spend a pretty penny trying to integrate the BPNL service into their checkout process. Moreover, some businesses, like tobacco and gaming companies, don’t even qualify for BPNL.
The biggest issue with BPNL is that it can encourage bad debt among customers. A lot of people end up spending more than they can afford when paying through BPNL, thinking that they only have to pay a small installment every month. However, with each purchase they make, this “small installment” becomes multiple small installments and eventually adds up to hundreds and thousands of dollars. If they don’t end up paying in time, they can end up with additional fees and ruin their credit scores.
Considering the bad debt incurred by BPNL services, there have been demands to tighten regulations to keep service providers in check. For instance, the Australia Finance Industry Association (AFIA) created a set of voluntary codes of practice for BPNL providers to ensure customer protection in 2021. Similarly, BPNL service providers in Singapore are also in talks to strengthen their customer protection systems.
In other parts of the world, governments have taken steps to regulate BPNL services. In the U.K., the government has recently released a set of rules which require the BPNL service to ensure the affordability of the loans they provide. Providers also have to be approved by the U.K.’s Financial Conduct Authority (FCA) before they begin offering their services. In India, the Reserve Bank of India (RBI) has forbidden BPNL companies from offering credit facilities on payment applications. This has been done because of BPNL companies’ history of bad credit reporting.
Despite the issues associated with them, at a market size of US$125 million as of 2021, BPNL services aren’t going away. In fact, it is expected that the BPNL market will grow to US$3268.26 billion by 2030. Overall, this model of payment can be a great way for companies to increase their profit margin. Ultimately, the choice of whether you want to introduce it as a service on your platform should be made taking all the pros and cons into account, particularly the regulatory changes we might soon see for this service.
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