The Rise of Buy Now, Pay Later: Understanding the Risks and Benefits

Buy Now, Pay Later is becoming increasingly popular. When it comes to deferred payments, consumers need a good sense of the day of reckoning.

E-commerce is booming – even if sales in Germany have fallen by around three percent from 86.7 billion euros in 2021 to 84.5 billion euros in 2022. A record value of 89.4 billion euros is expected for this year.

Buy Now, Pay Later (BNPL) is a popular financing model where buyers buy a product or service immediately but have to make payment at a later date. It is nothing more than a purchase on credit. This option harbors risks for online shoppers, especially if it is used frequently.

In a survey by statista from 2021 on the use of “buy now and pay later” for online purchases, 23 percent stated that they only paid the total amount of an invoice after a certain period of time in the last twelve months (e.g. a few weeks after the purchase ) to have paid. Another nine percent paid the total amount in installments without a surcharge and seven percent with a surcharge. Above all, a young, urban and tech-savvy target group uses this payment method. You can own things immediately that you haven’t even paid for yet.

Online shops have largely anchored many different payment methods in the checkout area for very simple reasons: Firstly, there is a high level of competition in payment options on the market, and secondly, the need of customers for uncomplicated and flexible payment is very great. If certain payment methods are missing in an online shop, customers will abandon their purchase and switch to other shops.

Implementing payment methods in the checkout is free for online merchants. You pay a transaction fee and a commission in the low single-digit percentage range of the purchase value for the credit check and the processing of the payment via the BNPL service provider. A basic fee may also apply.

An essential advantage for online shops arises from the fact that BNPL service providers pay the customer the purchase amount immediately to the dealer after a credit check. BNPL providers take over payment reminders, dunning and the debt collection process. They also bear the risk of fraud or non-payment.

With BNPL payments, online trade benefits from higher average shopping baskets and an increasing customer repeat purchase rate.

BNPL providers rely on transparency. On the one hand, customers can pay for their purchases in installments or after a period specified by the BNPL provider, usually without any additional fees. On the other hand, they can view the status of their invoices and payments made with their chosen BNPL service provider at any time. This process also increases customer satisfaction when shopping.

Some of the largest BNPL providers are Klarna, PayPal, Riverty (formerly: After Pay), Scalapay and Affirm.

• In addition to purchasing on account, Klarna allows its users to pay interest in installments over a period of up to 36 months. The annual percentage rate is up to 14.79 percent per year. With a purchase value of 250 euros and six installment payments spread over six months, this corresponds to additional costs of around 18.50 euros.
• Riverty customers can pay their bills 14 days after purchase. In the event of late payment, late payment surcharges apply.
• With Apple Pay Later, payments can also be divided into installments that can be repaid interest-free within 6 weeks – but only in the USA for the time being.
• With PayPal, installments can be divided into 3, 6, 12 or 24 months. The annual percentage rate here is between 9.99 and 11.99 percent per year.
• Affirm customers have the option to pay in 4 or in monthly installments. Pay in 4 means payment in four interest-free intervals within eight weeks. The installment purchase can be extended over a period of 36 months and is calculated with interest between zero and 36 percent.

In the youth finance monitor of the Schufa, for a third of the young buyers, the benefit of BNPL is, for example, to order a piece of clothing in several sizes to try on without having to pay for all the products at once. In addition, for 40 percent of those surveyed, the convenient purchase process and for 20 percent better financial planning play a role.

Buying now and paying later is fast, flexible and easy – but it also involves risks. What has a positive effect on the sales of online shops is not necessarily associated with advantages for online shoppers. Postponed bills or installment purchases can quickly lead to a spiral of disproportionately high bills for consumers.

Consumer credit law does not apply to microcredits of less than 200 euros or repayment within three months. These loans can be granted without a credit check. There is also no right of withdrawal. A written contract in which the costs for interest and other services are regulated is not required.

Buy-now-pay-later offers are not inherently bad for consumers. However, the Federal Financial Supervisory Authority (BaFin) points out that BNPL offers do not feel like spending money. If you use it frequently, you need a lot of discipline to keep track.