Howe & Rusling Wealth Management
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Brett Boyer, CFA, Equity Analyst

Comfortable Being Uncomfortable

What is BNPL?

BNPL stands for Buy Now Pay Later.  In a BNPL transaction, the consumer pays for the transaction amount in smaller increments over time until the total transaction amount is reached.  Over the past several years, BNPL has taken share from more traditional payment methods in the global payments ecosystem.  BNPL is often marketed as a new payment method.  However, it is merely a simple repackaging of an old idea – installment payments.  This form of consumer credit dates back to the mid-1800s.  One of the earliest examples of BNPL usage was Singer sewing machines, which sold for $1 at the time of purchase then $1 per week until the product was paid for in full.  Fintech (financial technology) companies have unearthed this old payment method and have revamped the idea with sleek marketing and phone applications as the BNPL offerings we know today.  

What companies offer BNPL services?

The largest BNPL providers are Affirm, Afterpay (acquired by Block, Block was formerly known as Square), Apple, Klarna, Sezzle, Zip Co / Quadpay, and PayPal “Pay in 4.”  Traditional payments companies such as debit/credit giants Visa and Mastercard have also started offering BNPL payment options.  

What is the typical structure of a BNPL transaction?

A series of installment payments are paid until the full purchase value is met.  The most common form is “pay in 4” which entails 4 equal installments paid every 2 weeks (total value paid off in 8 weeks).  Some BNPL companies offer flexibility in payment frequency, payment duration, and when applicable, interest required.  In many cases, interest is not charged if the consumer pays on time.  However, in instances where the consumer is late with payments, late fees and interest payments may be applicable.  

Why do consumers use BNPL?

BNPL offers a few benefits to consumers.  The most notable advantage is the ability to purchase an item without having to pay for the full cost upfront.  This can be particularly useful when a consumer on a budget wants to make a large ticket purchase.  For example, exercise bike company Peloton partners with BNPL company Affirm.  An entry level Peloton bike costs $1,500.  BNPL makes it possible for a larger number of consumers to be able to purchase the bike.  Some consumers also use BNPL due to the soft, limited, or non-existent nature of credit checks required to use BNPL.  Consumers with limited, poor, or no credit can use BNPL to make purchases they otherwise would be unable to complete due to their credit history.  The nature of credit checks for BNPL does not have a negative impact a consumers’ credit score.  Another advantage offered by BNPL is installments can be interest free if the consumer makes all scheduled payments on time.  Many consumers, particularly younger generations, find this to be more straightforward than the typical high fees associated with delayed (late) credit card payments.  Survey data shows that younger generations have a high degree of mistrust for the traditional finance industry and credit card companies, which has fostered growth for BNPL.  

What are downsides and problems with BNPL?

There are several problems with BNPL and concerns we have regarding the industry.  BNPL places financial responsibility on the consumer to not overextend themselves.  Consumers are often drawn to this payment option because they do not have to pay for the entire purchase upfront.  Survey data indicates that 66% of shoppers using BNPL have used this payment method to buy more than they would have if they were required to pay in full.  In addition, it appears that consumers are primarily using BNPL to pay for discretionary items rather than necessities.  Clothing and shoes are among the most popular items purchased with BNPL.  69% of shoppers using BNPL have done so in order to afford designer (luxury) items.  These datapoints indicate that consumers are not always fiscally responsible with BNPL services and are overspending with their assistance.  While many BNPL services advertise as interest free and are true to that policy if payments are made on time, more than 70% of BNPL users are ultimately charged late fees or interest on BNPL transactions.  Roughly 33% of consumers were unaware what fees or charges would apply if they missed payments.  At present, the industry is fairly unregulated, which leaves consumers less protected than they would be in other more traditional areas of finance and payments.  Given the growth of BNPL, we expect that greater consumer protections will be introduced by regulators.  

Concluding Thoughts

In our view, the option to choose a BNPL payment option at checkout needs to be approached with caution.  The service can be useful to those that are responsible with their budgets and stick to the elected payment schedule.  It is important to understand the terms of the payment agreement as well as any applicable interest, late fees, or other charges included.  At the industry level, we hold some concerns about industry structure, profitability, and health during times of economic weakness.  Given the nature of BNPL usage described in previous section, the industry may face some acute challenges down the line.  As time progresses, we will continue to monitor the industry to see how it evolves as yet another option available to consumers in the world of personal finance.  

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