Unless you’ve been living under a physical rock, you’ve probably noticed offers to buy with ‘interest free payments’ on any website with something for sale.
These offers have collectively become known as Buy Now, Pay Later, or BNPL for short. BNPL apps allows you to pay for purchases in weekly or monthly installments, and without fees. Their popularity has skyrocketed in the last year and the Covid-19 pandemic has undoubtedly been an enormous contributor. It’s estimated that the BNPL industry generated $20-25 billion in purchases last year and is on track to exceed $1 trillion by 2025.
How does it work?
Afterpay and Klarna are probably two of the most recognizable BNPL lenders that offer a ‘Pay in 4’ approach. A ‘Pay in 4’ plan allows shoppers to split their purchase into four equal installments, with the first due at checkout and the remaining three due every two weeks. The expectation that that you’ll be all paid up within six weeks from purchase date. While there are no fees to use the service there are late fees for late payments.
Affirm is another BNPL company that offers shoppers the ability to spread out payments through installments. But instead of having to pay 25% up front and late fees if you miss payments, Affirm will propose a customized payment schedule for you to review and agree to before proceeding to purchase. As part of this customized plan will be your percentage APR to borrow the money based on all the info you provide during pre-qualification.
| Afterpay | Klarna | Affirm | |
| How much is due at time of purchase? | 25% | 25% | 0%+ (depends on various pre-qualification factors) |
| What are the repayment terms? | Pay 25% every 2 weeks | Pay 25% every 2 weeks | 3, 6, 12 months (depends on what you select during pre-qualification) |
| Are there late fees? | $8 per missed payment | $7 per missed payment | none |
| Is there interest? | None | None | 0-30% (based on pre-qualification terms) |
| Is there a credit check? | No | Soft check (what’s a soft credit check?) | Soft check (what’s a soft credit check?) |
| Is there a minimum score required? | No | Won’t say for sure | Your soft credit score will determine your loan eligibility and APR% |
| Report non-payments to credit bureaus? | Yes, reserve the right to report | Yes, reserve the right to report | Yes, reserve the right to report |
| What happens if I can’t pay at all? | You will be prevented from making further purchases | You may be blocked from making further purchases | Not explicit but say that partial or late payments may hurt your credit score/chances of getting another loan. |
| What’s the average shopping cart spend? | less than $250 | less than $250 | between $250-$3,000 |
| Number of merchants offering BNPL? | 100,000+ | 250,000+ | 100,000+ |
| What are some brands are using this option? | Urban Outfitters Ulta Beauty MAC Bed Bath & Beyond Pier 1 | H&M Calvin Klein Lululemon Macy’s Sephora Gamestop | Peleton Best Buy The RealReal Walmart Nike Adidas |
What’s made BNPL become so popular?
It’s always amazing to see what great marketing can do, and BNPL is no exception. Klarna’s messaging is on point with Gen-Z, and its feel-good, cute, and kitschy photography is focused on a clear target that loves to shop. Before I even knew what Klarna was I remember seeing their ad takeover of the Spring Street subway station that left me with a very memorable feeling of ‘I have no idea what this is, but I want it!’. Don’t even get me started on their ‘The Four Quarter-Sized Cowboys‘ Super Bowl commercial.
Aside from doing a fantastic job at making you want to buy things, BNPL does offer an alternatives way to make purchases for those without access to credit or a credit card. Due to irregular incomes or lack of or poor credit in general, BNPL provides a way to make a purchase without having to front too much cash up front. It’s estimated that some 53 million adults in the US lack traditional credit scores.
From personal experience I can say that when I first moved to the US, I couldn’t even buy a cell phone because I had zero credit. I quickly found that having no credit is almost on par with having bad credit in terms of how restricting it is.
When you sign up for BNPL, you can link directly to your bank account versus relying on a credit score to decide your fate. But this is also why so many people are starting to fall into the BNPL trap and overspending. Since many of the BNPL services don’t do a hard credit check, they become attractive options to people who perhaps aren’t in the best credit situations, which often leads them further into debt if they’re unable to control their spending. It goes without saying that while many BNPL companies say they won’t check your credit to approve you for a loan, they will report you to credit agencies that’ll make an already poor score worse.
Results of a recent Harris Poll that asked a group of users why they used a buy now, pay later service in the past 12 months:
Why are so many retailers offering PBPL?
As much as we’d like to believe these companies are looking out for our best interests, they make money but try to sell you as much as possible in hopes that you’ll miss or get behind on your payments.
Offering a way of paying that reduces that first ‘hit’ to your wallet makes things that were once out of reach suddenly appear affordable. With BNPL, merchants are now also able to attract new customers. Incentivized that they don’t have to pay in full immediately, customers feel like they have more money to spend, either on more high-end products or just buying more overall. So by offering BNPL, stores have found a way to increase average order values.
- A 2019 case study released by Klarna highlighted how fitness clothing retailer Gymshark experienced a 33% increase in customer basket size after it added a BNPL option at checkout.
- Afterpay has stated that it can increase a retailer’s conversion rate and incremental sales by 20% to 30% more than other payment options.
- Klarna, on their website, says that retailers see a 45% increase in average order value when offering ‘Pay in 4’.
- Affirm boasts that its merchant clients report an 85% increase in average order value when consumers use its BNPL plan over other payment methods.
One stat that’s harder to measure is the claim these companies make that just offering BNPL alone can improve a user’s experience in the payment process and their impression of the brand, especially if the user has an unfavorable impression of credit cards. Afterpay has said that younger shoppers’ concerns about credit card interest, hidden fees, and revolving debt have led to the growing trend away from using credit cards, which is another reason to offer BNPL.
How do merchants fit in?
Late fees for installments and interest are not the only way BNPL companies make money. Similar to how credit companies charge merchants a percentage of every sale to use their service, BNPL companies make the same arrangements. Actual fees merchants pay can vary based on individually negotiated agreements but range anywhere between 2-8% of a sale in addition to a small fixed amount.
This may seem high compared to the 2-3% typically charged by credit card companies, but considering BNPL allows retailers to attract an utterly untapped customer base and the chance to sell them more, making it worth it. In addition, the ability to completely offload the work and risk for the collection of payments to the BNPL company makes BNPL a desirable proposition.
So what’s the catch?
The most significant catch people fall for is believing that BNPL is debit when it’s 100% credit. But unlike credit cards or loans, you can’t build credit with this type of financing. BNPL providers don’t typically report on-time payments to the major credit bureaus, but they will if you’re late. Especially for young people trying to build their credit, they won’t be rewarded for being on time but will be punished for being late.
And because BNPL installments can be automatically billed to your debit card, if you’re not paying attention, you could overdraw your account, resulting in penalty fees from your bank in addition.
BNPL companies claim that customers love BNPL because it puts the power back in their hands. They’re not an evil credit card company that’s going to saddle you with debt forever. At face value, it appears to make sense, especially at that moment when you see that shiny thing you’ve wanted but could never reasonably afford. But underneath it all, what you’re getting is a loan. And just like a credit card, if you can’t pay your bill, it’s going to cost you. And once the debt collection account shows up on the credit report, it creates a more significant barrier to overcome as the cost of borrowing goes up, and your credit score goes down.
In a recent Credit Karma survey, 34% of BNPL users have fallen behind on payments. In addition, according to the study, more than half of Gen Z and millennial respondents who have used BNPL services say they have missed at least one payment, compared to 22% of Gen X and just 10% of Boomers.
Most of these BNPL companies also have their own app, which you can use to access your payment schedule and communicate with the company on your status if you think you might or have fallen behind. But also within the app is a list and access to all the merchants on their platform, sending you access to daily deals, sales, curated products based on past purchases, and even delivery updates and order status. All of this makes it hard to resist just ‘one more purchase.’
Are there times when using BNPL makes sense?
If the BNPL plan offers zero interest and a schedule to make payments that you can commit to, it can be a great way to make a larger ticket purchase.
Large purchases, in this case, should be essentials, like a bed, a dishwasher, or a computer; things that you’ll use as part of daily life and can feel the value in when payment time rolls around. You’ll feel much better making payments on something that’s actually making your life better versus on something like pink faux-snakeskin boots you haven’t even worn once.
But if you’re focused on building credit, it’s best to look elsewhere. Although credit cards become problematic when used recklessly but used mindfully, a credit card can offer rewards, cashback, theft protection, insurance and are a way to build your credit over time.
Know what’s right for you
If you’re someone who can stay on top of a budget, you might find that BNPL presents opportunities to spread out payments enabling you to buy something you might not otherwise have been able to afford.
Spending beyond one’s means seems pretty standard these days, but if you can try to ignore the FOMO and focus on your goals, the need to have so many ‘things’ that bring only short-term gratification will become less and less appealing. And maybe the name itself can act as a friendly reminder, if you buy now, you might pay later.
It’s worth noting that the 3 companies mentioned above (Afterpay, Klarna, and Affirm) are just three of the most notable players right now. PayPal has recently jumped into the BNPL space with their offer of a no-interest installment plan; just note that theirs comes with hard credit check to qualify and you’ll be subject to deferred interest on the entire amount of the purchase if your payments are late.
Credit card companies are also not going to let this opportunity pass them by. AMEX has a feature called ‘Pay it, Plan it‘ that lets cardholders split eligible purchases of $100 or more into fixed monthly installments for a fixed fee you can accept (or not) up front. Chase and Citibank also now offer similar opportunities to spread out payments.
As always, the best advice is to always do your own research before making a decision. BNPL and credit cards both offer great opportunities to maximize you money if you know how to use them to your advantage.
If you’ve used BNPL and have an experience, good or bad, that other people might find helpful, I’d love to hear about it.
Appity Snacks 
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