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Buy Now, Pay Later—A Deep Dive.

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In quarter three of 2014, American non-housing debt stood at $3.07 trillion, but in quarter three of 2021, that debt had ballooned to $4.25 trillion. The dramatic rise in credit card debt should surprise no one. Credit cards make it easy and painless for consumers to purchase small and big-ticket items.

But, for many consumers, it can be hard to stomach large, one-time purchases with their credit card. So, for many reasons, from the psychological effect of spending a lot of money on a purchase to not covering paying off their credit card bill, consumers have now been given another outlet to pay for what they buy.

Known simply as “Buy Now, Pay Later” (BNPL), consumers can mitigate both of the fears mentioned above with this payment option. But, first, we’ll explore what BNPL is, how it works, and some of the foremost providers of this service. We’ll also explore whether this relatively new payment option is a direct threat to the credit card industry and what BNPL’s impact could be on credit card debt.

Buy Now, Pay Later. What is it?

BNPL is a payment option for consumers that allows them to purchase their item in installments rather than in one lump sum like they would with a credit card payment.

For example, let’s say Bob wants to buy that Ultra 4K HD television that costs $4,000. This $4,000 may be significantly above his credit card limit, but with BNPL, he can pay off this TV in installments. With BNPL, Bob would have to pay off a set percentage of the $4,000, perhaps 25%, and then be required to pay off the rest of the TV in a set number of installments. 

Another attractive feature of BNPL is that it won’t charge you interest on the installment payments either. However, if you miss paying off the installments, you’ll be charged interest or a fixed fee.

The installment payments you will need to make are usually fixed and at fixed intervals. If we go back to Bob’s example, after paying off the 25% down payment on the TV, Bob still has $3,000 left to pay back in installments. Depending on the BNPL provider he chooses, the remaining $3,000 is paid back in a pre-arranged agreement. For this, Bob might have to pay $500 for each payment installment, and these installments could be spread apart by one month. Thus, Bob would have to pay back the remaining $3,000 within six months ($500 x 6 months = $3,000) and interest-free.

How To Select a BNPL Payment Option

To pay for your purchase with the BNPL option, the retailer from which you purchase your item has to offer this payment option. First, note that not every retailer offers this payment option. The second important thing to remember is that not everyone is qualified to pay with BNPL. 

If a retailer you’re buying your item from offers it, when you go to pay for it, you can select the BNPL option upon which you will then be either approved or rejected for this form of payment. A few factors go into this decision, with the most important one being your credit score. If your credit rating is low, you will more than likely be rejected.

An essential point about BNPL is that it’s an alternative and viable payment solution for consumers who have demonstrated a history of dependable repayments. It’s not for people who run away from their credit card debt or have repayment problems, and the credit check when trying to pay by BNPL is a prime example of what’s considered upon application.

If approved for BNPL, and after paying the initial down payment on the item you wish to buy, you’ll repay the balance in fixed installments. Repaying these installments can be done in a few different ways as well. For example, you can issue a cheque, a bank transfer or have it come out of your credit or debit card. This approach offers the consumer more flexibility to pay off the balance on their item.

Credit Card Disruptor?

Buy Now, Pay Later is a popular form of payment exacerbated by the pandemic. As many consumers turned to online shopping, the increase in BNPL payment options by online retailers only grew to meet the consumers where they were shopping.

The rise in BNPL options has led to an obvious question: is this payment option a direct threat to the credit card industry? This question is only natural to ask as the emergence of BNPL means that fewer people are paying by credit card. However, the answer to this is more complicated and is likely a yes and no.

Yes, it is a direct threat to the credit card industry because fewer people are paying for their purchases with their credit cards. In addition, less money goes to credit card companies such as Visa, American Express, and Mastercard because they rely on the micro-fees they charge retailers for accepting their credit cards. 

We can also say that BNPL has its risks from which the credit card industry can benefit. One of these risks is increasing consumer debt. While BNPL is an attractive payment option, it’s still a form of lending that you need to pay off, much like a credit card. So a rapidly rising increase in BNPL could lead consumers to sign-up for more credit cards to help pay off their BNPL debt, which would benefit credit card companies.

Credit card companies like Visa and Mastercard see BNPL as a direct threat and a massive opportunity. As a result, they have already begun trying to leverage this new payment form by introducing their versions of BNPL. 

The big credit card companies aren’t going anywhere, but they should feel the heat of BNPL. However, as Visa and Mastercard have shown already, they can convert a real threat into an opportunity by expanding offerings to their customers.

Best Buy Now, Pay Later Companies in Canada

The increase in BNPL has produced a wealth of companies that offer this payment form. However, these are just a handful of the biggest BNPL providers today.

Affirm

Affirm is the most popular buy now, pay later payment solution, and many large retailers, including Walmart and Expedia, use this option. Affirm is a publicly-traded company, and its stock price has soared in 2021. Its 2021 Q4 earnings report saw its stock soar a mind-boggling 34.4% a day. Affirm is the fastest-growing BNPL company right now, and their 71% surge in year-over-year revenues is a direct reflection of that.

Many retailers and consumers prefer to use Affirm because it allows consumers to purchase big-ticket items up to $17,500. There are also no late fees incurred if you’re late repaying an installment. However, the catch is that retailers can charge pretty high-interest rates ranging from 10-30%.

In terms of repayment installments, since it does allow for higher-priced purchases, you can set your repayment schedule intervals at 3, 6, 9, or 12 months. This is considerably longer than other BNPL repayment installments that typically are spread out only by weeks or a few months.

Afterpay

Afterpay is a BNPL solution targeted towards a younger demographic, either Millennials or Generation Z, and used by Forever 21 and Old Navy retailers.

Afterpay has more innovative credit limits that help ensure consumers can pay for the entirety of their purchases. In addition, when you download their mobile app, you’ll receive notifications when it comes time to repay an installment. 

Speaking of installments, Afterpay allows users to pay for their purchases with four equal payment installments. These payments come with no interest rates when delivered on time, but when they are not, users will be hit with a minimum of a $10 penalty to a maximum of 25% of your total purchase price, depending on the retailer. 

Afterpay requires consumers to pay 25% of their purchase up-front, with the remainder due with the four installments.

Paybright

Paybright is one of Canada’s best BNPL payment providers because of its flexibility. Its main selling point is that you can buy small or large-ticket items, and each has flexible payment frequencies.

For smaller purchases, you can pay off the balance of your purchase in four bi-weekly payments that are interest-free. You can make automatic, monthly payments from 6 to 60 months for more significant purchases. 

Consumers will also be happy to know that Paybright will not charge you any late fees on your payments. However, if you are late making a payment, Paybright says you will be ineligible to make another future purchase using its services.

Some of the more notable retailers that use Paybright as a BNPL option include Samsung and Wayfair.ca. 

Wrapping It Up

The buy now, pay later payment revolution disrupts the payment solution game and gives consumers another attractive way to pay for their purchases. On top of being an industry on the rise, it is also forcing other non-BNPL payment providers to explore offering this to their customers. 

BNPL is already a $100 billion industry, and that figure is likely only going to grow as more competitors jump in, and existing payment providers expand their offerings. So while mega-credit card companies and digital payment companies like Square and PayPal should be concerned about this new way of paying, they should also see it as another opportunity to engage their existing customers in a new way.

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