Not all Buy Now Pay Later models are alike, not by a long shot, and it pays to know the difference.
All of them offer convenient - and increasingly popular - payment options for customers and merchants. The surge of BNPL revenues, predicted to top $15 billion in global revenues by 2026, has been fueled by the growth of online shopping during the coronavirus pandemic, rising adoption by younger consumers and added awareness of the option among both merchants and shoppers.
But beyond this essential commonality, there are some noteworthy differences.
Some models are most suitable for low-cost items, while others are designed to help consumers afford one-off big ticket purchases. Some feature short-term installment plans, while others offer the option to stretch payments over several months or years. Some target consumers with less credit strength, while others best serve those with more buying power.
The basic BNPL model is “Pay in 4,” an offering that allows consumers to pay in four interest-free installments over six weeks with the first payment due at the time of purchase. This model is popular for smaller-ticket items (less than $250). Most “Pay in 4” sales - 80% to 90%, according to data from McKinsey & Co. - hover at just over $100.
Used often in the retail categories of beauty, fitness, footwear and clothing, the “Pay in 4” option has proven successful for BNPL industry leaders like Afterpay and Klarna.
The popularity of this model with shoppers stems in large part from the fact that, because it is merchant-subsidized, it features no-interest payments for the consumer. The merchant might pay the BNPL provider 3% to 6% of the purchase price, a cost rendered worthwhile since shoppers who take advantage of the plan are often inclined both to buy more and to make repeat visits.
With its instant approval, “Pay in 4” reaches consumers at the lower end of the credit-score range and can involve a so-called soft credit check that has no bearing on credit scores. But a consumer who pays late or misses a payment can face potentially hefty penalties and deferred interest charges. Late fees at Afterpay, for example, top out at a whopping 25% of the purchase price.
Some BNPL providers are taking this model further by launching their own apps that act as virtual shopping malls. Afterpay.com is a consumer gateway with tempting sales and discounts on such items as high-end cosmetics and designer accessories and apparel. The provider also offers its Afterpay Card, a digital Mastercard, for consumers to use at selected merchants.
Klarna.com’s site, which provides easy access to such in-demand shopping sites as Etsy.com, Bed Bath & Beyond, Adidas and Lululemon, has added a new “Pay Now” option at checkout. It also has a “Pay in 30 Days” interest-free option, as well a Klarna Card, allowing for four interest-free installments, in Europe. A similar card option is in the works for the U.S. market.
Affirm has a Debit+ card that can be linked to a customer’s personal bank account and gives the buyer the option to split up payments on eligible purchases into four installments, interest-free. The company linked up last year with Amazon and also offers point-of-sale loans at such retailers as Pottery Barn, with interest rates ranging from 0% to 30%, depending upon the customer’s credit.
For consumers who need more time, there are what are called off-card financing solutions. These typically apply to purchases between $250 and $3,000, with an average of about $800, of items such as furniture, home goods and electronics. Monthly payments tend to span eight or nine months. With this option, consumers pay a 0% APR to start, then move into a relatively low interest rate. Most shoppers using off-card financing have good credit already but choose BNPL providers since they generally offer lower rates than bank-issued cards.
Credit card companies have begun to offer BNPL systems as well, allowing customers to divide up their payments into installments, typically with a monthly fee. Some such plans include “My Chase Plan,” “Citi Flex Pay” and American Express’s “Pay It Plan It.”
The third-party provider Splitit lets customers divide up charges on their existing credit cards into monthly no-interest installments.
The PayPal Credit model features interest-free payments for items over $99, spread over six months, but requires a hard credit check that can affect the customer’s credit rating. A balance not paid off in full triggers deferred interest on the whole amount, at a rate that clocks in at about 24%.
Another design is the virtual rent-to-own model, aimed largely at consumers with lower credit scores and involving high interest rates. In this model, the provider, not the merchant, subsidizes the loan. This is predominantly used for purchases such as furniture, mattresses, appliances and electronics: higher-cost items that can be repossessed from a non-paying customer.
Unfortunately, one subset of this model – the “no credit needed” rent-to-own offering – can be rife with abuse, used to lure vulnerable buyers with deceptive agreements, hidden fees and misleading cancellation terms.
“Virtual lease-to-own providers are simply profiting from consumer deception,” said Lorelai Salas, head of New York City’s Department of Consumer and Worker Protection, at the release of a 2021 report, “The New Rent-to-Own: More Confusing, Still Expensive, and Offered at an NYC Store Near You.”
At the top end of the purchase price spectrum are what the industry calls “vertical-focused larger-ticket plays.” These include GreenSky, which provides upfront loans for home improvement projects, and CareCredit, which focuses on healthcare expenses. CareCredit loans range from zero interest in certain cases, up to longer-term loans with rates of nearly 18%.
Healthcare purchases can include dental work or veterinary services and cost from $2,000 to $10,000, while home improvement expenses such as heating and air conditioning, remodeling and roofing can range from $5,000 all the way to $50,000.
When it comes to BNPL, one size clearly doesn’t fit all. But the ample choice of models means shoppers are sure to find one that will work for their unique set of circumstances.
Done right, BNPLs give consumers new opportunities to shop with ease, break major purchases into affordable tranches, overcome the obstacles posed by weak credit and avoid the high interest rates charged by many bank-sponsored credit cards. For merchants, boosting the volume and size of customer orders, growing the number of new and loyal repeat customers and making customers more comfortable as they consider big one-time buys are welcome, win-win benefits.
BNPL truly offers something for everyone.