The Secret Behind Buy Now, Pay Later Schemes

Did you know that the Buy Now Pay Later (BNPL) schemes, while seemingly convenient, can lead to a temptation to buy more stuff than needed hence overspending, debt accumulation and potentially negative impacts on credit scores due to late or missed payments. 

This time is an era where convenience is the king. So in this article we analyse how BNPL works, its potential benefits and risks and why it is becoming an increasingly presiding force in the modern retail industry.

Business model of BPNL-

The business model is a short-term financing option that allows consumers to make purchases and pay for them in instalments over a set period, often interest-free, with the BNPL provider receiving the full payment upfront from the merchant. 

Key Features of BNPL:

• Short-Term Financing: BNPL offers a way to finance purchases without taking on a traditional loan. 

• Instalment Payments: Customers can pay for purchases in smaller, more manageable instalments. 

• Interest-Free: Many BNPL services offer interest-free options, making them attractive to consumers. 

• Convenience: BNPL simplifies the payment process, allowing customers to make purchases without immediate payment. 

• Targeting Young Consumers: BNPL has become popular among young, tech-savvy consumers. 

BNPL as a New Financial Instrument & Its impact on Consumer's Buying Behaviour

What is the benefit of buy now pay later?    

If you use buy now pay later carefully you could delay paying for something for several months and not pay a penny in interest. Many of the big firms won't charge you any interest if you clear your balance before your delay period is up – even if you only pay the day before.

In India, popular "Buy Now, Pay Later" (BNPL) options include Amazon Pay Later, Flipkart Pay Later and Ola Money Postpaid, offering convenient instalment plans for online purchases. 

BNPL use on credit cards

Our first main finding is documenting the existence of charging of BNPL transactions to credit cards. BNPL transactions are commonly present on credit cards: 19.5% of UK credit cards active (i.e. with any transaction present) in December 2021 have a transaction by a BNPL firm charged to their credit card during 2021.

Detailed breakdown of the drawbacks:

• Overspending and Impulse Purchases:

The instalment payments and smaller amounts can make larger purchases seem affordable, leading to overspending and impulsive buying habits. 

• Debt Accumulation:

BNPL schemes can encourage consumers to spend beyond their means, leading to debt accumulation and difficulty managing repayments. 

• Negative Impact on Credit Score:

While some BNPL providers don't conduct credit checks initially, missed or late payments can negatively impact your credit score and future loan applications. 

• Higher Merchant Fees:

For businesses, BNPL services can lead to higher merchant fees, potentially cutting into profit margins. 

• Difficult Returns:

Returns on items purchased through BNPL can be complicated and may involve additional fees or delays. 

Beware Consumer: Late fees can add up and hurt your credit score too.

                                                                        So think twice before you buy.