Buy Now Pay Later: Bringing Convenience to Loans
June 29, 2023
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Credit cards have been a convenient method of payment for decades now. Over the years, they evolved from plastic cards with set limits to online loan systems, including the newest trend: buy now pay later solutions. Paying in installments after the purchase is already taking over the traditional credit card, with BNPL users predicted to grow from 360 million in 2022 to 900 million by 2027.
In this blog post, we will explain what BNPL solutions are, why so many customers prefer them over other credit payment methods, and how to prepare your fintech company for BNPL implementation.
What is a BNPL (Buy Now Pay Later) model?
A buy now pay later model is a short-term financial service where a customer can purchase an item and pay for it later in installments, usually with a zero interest rate. Many BNPL solutions don’t require any down payment, while others ask for a 25% upfront payment. The loans usually range between $50-1,000.
How does this system work for BNPL providers like fintech companies? As a rule, buy now pay later service providers pay the merchant right away from their funds and then receive installments from the customer.
BNPL can be introduced in several ways, including
- Mobile apps
- Plastic cards
- Virtual cards
- Browser extensions
Many BNPL companies combine several methods and allow their users, for example, to both download an app and get a physical card. Some of the biggest BNPL providers today are Affirm, Afterpay, Klarna, and Sezzle.
In the past, BNPL solutions were mainly used for apparel and beauty niches, whereas now customers choose to pay in installments for travel expenses, pet care, and even groceries.
BNPL services are trending for online retail as they allow customers to get goods immediately and set up a loan right on the e-commerce platform without any additional documentation.
Why do customers opt for BNPL solutions?
A high level of convenience and accessibility for online shopping are obvious benefits of the buy now pay later model. But what are some of the others that motivate more and more customers to try it out?
Zero interest rate
Most of the buy now pay later solutions offer a 0% interest rate, so users just pay for the item in installments without any extra fees. As a result, BNPL wins against regular credit cards where at least a few percent of interest rate is often unavoidable.
One thing for users to pay attention to is the specific deadline they must meet to avoid extra payments. After the payment deadline runs out, a late fee is charged, often coming up as a significant percentage of the overall purchase cost.
Shopping services’ integration
Many big marketplaces and online retailers, such as Amazon or Walmart, either accept BNPL from dedicated services or have their own BNPL offer. It's extremely convenient for users: they don’t have to bother setting up loans, linking their credit cards, or contacting banks. All they need to do is select a BNPL internal or external service as a preferred payment method. Klarna has become a common payment method on numerous platforms and individual shops, like PayPal or debit cards.
What’s more, many buy now pay later providers act like marketplaces themselves too. For example, on Afterpay’s website or app, you can select an online shop and purchase in installments directly through your Afterpay account.
The main principle of buy now pay later solutions is letting users pay the full cost of an item on a later date or dividing the price into installments, say four of 25% payments. The process is predictable and easy to follow: the customers know exactly when the next payment has to be made and can set up a convenient payment method, like an automatic recurring transfer from their debit card.
Plus, payment deadlines are not necessarily monthly like with traditional credit cards. While some BNPL providers have fixed repayment frequency, others give all control over to the users and let them adapt the loan repayment to their budgeting. Users can set up weekly, monthly, or even bimonthly transfers, getting more flexibility over their finances.
For example, Afterpay and Sezzle offer 6-week loans that must be paid in 4 installments, but Affirm allows extending payments for as long as 12 months.
Immediate online accessibility
One more reason why buy now pay later solutions are gaining such popularity is their incredible level of accessibility. There is no extra effort expected from the customer to get a loan. They can simply select a BNPL provider as a payment method on the e-commerce platforms or make purchases directly through the fintech platforms.
What’s more, there is no need to visit banks or go through extensive paperwork because an installment loan is available through the eKYC (Electronic Know Your Customer) system. Users just need to upload a picture of their identity card and a selfie to prove their identity.
Most BNPL services only require a soft credit check meaning that it doesn’t influence the customer’s credit score and speeds up the loan granting. BNPL loans also do not go on the user’s credit record and, unlike traditional credit cards, ask for no strings attached: a person can buy a product through such a service once and then never use it again.
It’s not surprising at all that BNPL solutions predominantly attract a young audience who is more wary about signing up for long-term credit card commitments. 37% of Gen Z and 30% of millennials have used buy now pay later services, compared with 17% of Gen X and 6% of baby boomers.
Young users seek convenient, fast financing solutions that don’t require jumping through hoops. That’s why to win this audience, fintech companies need to start introducing BNPL in their service range.
Which challenges to look out for when implementing BNPL?
Considering all the benefits buy now pay later services offer customers, it is high time for fintech and e-commerce companies to consider adding such a feature to their functionality. Let’s now look into some aspects of BNPL solutions you should be aware of before starting the development journey.
One of the common issues with buy now pay later services is the very nature of these tools. Because only a minimal background check and paperwork are involved, some users might feel less accountable for paying their loans.
Plus, some BNPL users can rely on such services for non-essential shopping, like high-end clothing, and might take out loans for items they normally do not tend to afford, which can cause problems paying off the debts.
What you can do: Your task here is to ensure that every user feels responsible for paying off a loan and can do that. Among the methods of achieving this are setting up a secure eKYC system, running soft credit checks, and developing clear policies and regulations. Plus, remember to work out your user interface concept in a way that would promote and encourage accountability.
Additionally, some of the BNPL providers in the US are already reporting to three major credit bureaus (Equifax, Experian, and TransUnion). These reports influence customers’ credit scores but give the company an extra layer of security and prove the clients’ ability to pay off their debt.
Complying with financial regulations
The soft credit check procedure, as opposed to hard pulls for regular credits, is a major advantage of buy now pay later solutions as seen by customers. At the same time, buy now pay later providers need to make sure their service doesn’t violate any banking regulations in a given region, and their clients are protected.
As for now, the regulations of BNPL are limited, but more is to come. The CFPB (Consumer Financial Protection Bureau) has recently been looking at BNPL services and has issued a report outlining its plans to tighten the regulation of the BNPL industry. The organization promised to develop a set of rules to ensure that BNPL providers are subject to similar baseline protections as credit card companies. The state of California has already incorporated BNPL services under its California Financing Law, and all the buy now pay later plans are considered loans.
What you can do: To be sure your new fintech service complies with current and upcoming financial regulations, choose a technology provider who knows the ins and outs of the fintech business, like Perfsol.
Building reliable BNPL infrastructure
Any financial organization, including those offering BNPL solutions, needs a secure and reliable software system as they deal with clients' sensitive data and funds transfers daily. If you want to build long-lasting relationships with users and partners alike, taking good care of your software infrastructure, including a user-friendly front-end and vulnerability-free back-end, is a must.
What you can do: Not every software development service provider can build a secure fintech solution. It takes a deep understanding of financial processes, regional regulations, banking compliances, and user preferences to create a BNPL service that will function properly long-term and attract new customers.
Your task is to find an experienced and trustworthy tech partner specializing in fintech who can provide a portfolio of completed domain projects and has high technological expertise for building web and mobile product versions. Perfsol is exactly that – we specialize in the fintech domain and have built financial services for US and European clients.
We all are constantly looking for ways to simplify our lives, including the financial aspect. With many restrictions and commitments of credit cards, buy now pay later loans have become a more convenient alternative to online shopping. Buy now pay later offers zero interest rates, seamless integration with various marketplaces and shops, immediate online accessibility, and predictable payment scheduling.
All these attract a younger audience who are not so keen on regular credit cards. Consider implementing the buy now pay later functionality to engage this group and bring more benefits to your existing users. With a reliable and skilled tech partner like Perfsol, it will be a piece of cake, we promise.
I follow a proactive approach in life to solve simple to complex problems systematically. I fully understand the nexus of people, process, technology, and culture to get the best out of everyone at Perfsol to grow the businesses and deliver a societal impact at the national and global levels.