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How to buy now, how to pay later has become a $ 100 billion industry

The Klarna logo on laptop and phone screens.

Jakub Porzycki | NurPhoto via Getty Images

It will take some time to buy now and pay later.

Today, millions of shoppers buy now, pay later, or use the BNPL service to fund their purchases. And the options are more diverse than ever — Klarna, Affirm, and Afterpay are just a few of the many providers in this space.

Meanwhile, big companies are on the move, PayPal launches its own product, Amazon and Apple have partnered with Affirm, and Square has agreed to buy Afterpay in a $ 29 billion deal.

BNPL companies are promoting their services as a better alternative to credit cards. But critics are worried that many people are spending more than they can afford, and may not even realize they are in debt.

So what do you buy now and pay later? And why is it suddenly booming?

What is BNPL?

The BNPL plan, also known as a point-of-sale loan, allows shoppers to pay for goods over a period of installments.

The concept is not new. Installment plans, known as “layaways” in the United States and “layaways” in Australia, have been around for years. These agreements allow people to spread the cost of items over a period of time.

BNPL is similar in that consumers pay in advance for their products, often interest-free and in stages.

Buyers can choose to use the BNPL service when checking out online with just a few clicks. They usually pay the first installment and will be charged the remaining amount within 3-4 months.

BNPL providers often add a checkout button to the retailer’s website to get a cut from the merchant on a transaction-by-transaction basis. According to experts, retailers are motivated to agree to this. This is because the average order value is high and the conversion rate is often high.

Some BNPL companies also earn income from delinquency fees and long-term installment interest.

The advantage for shoppers is that they can buy items that are more expensive than they would normally be able to pay in one go (for example, a $ 300 jacket) and spread the purchase cost in monthly installments.

Why is it so popular?

A word: Coronavirus.

The pandemic has forced many retailers in physical stores to temporarily close, allowing consumers to spend more time at home.

This has accelerated the growth of online shopping. Last year, global e-commerce transactions totaled $ 4.6 trillion, up 19% from 2019, according to a report from FIS-owned payment processing company Worldpay.

BNPL accounted for 2.1% of that total, or about $ 97 billion. According to Worldpay, this figure is expected to double by 2024 to 4.2%.

The BNPL program was already popular before the pandemic, but the market has risen significantly due to changes in consumer spending habits and the surge in e-commerce adoption.

This has benefited many companies in the field as Klarna reached a $ 46 billion valuation in a recent private funding round, PayPal acquired Japanese company Paidy for $ 2.7 billion, and Square acquired Afterpay. Is bringing.

What are the risks?

One of the main criticisms of BNPL is that it can encourage shoppers to spend more than they can afford. Postpaid plans are especially popular with millennial and Gen Z shoppers.

Which, a British consumer advocacy group? The survey found that nearly a quarter of BNPL users spent more than originally intended because the service was available.

There are also concerns about how easy it is for people to borrow money, sometimes unnoticed, as it does not include a rigorous credit check.

This sector has often been compared to the controversial payday loans that allow high interest rate short-term borrowing. BNPL is usually interest-free, but some providers charge high late fees.

The BNPL provider states that it has taken safety precautions to prevent users from overusing it. For example, Klarna sets spending limits on a case-by-case basis.

“For every transaction, we take a new position and look at how consumers are using this product,” Klarna CEO Sebastian Siemiatkowski told CNBC.

“If they are actively using it, we can expand our ability to use it. If not, we limit our ability to use it or use it altogether. Stop the ability to do. “

But critics argue that BNPL needs regulation to adequately protect consumers. The UK government is trying to curb the industry with a variety of proposals, including checking customer affordability. Discussions on the rules will be announced in October.

Klarna and Clearpay, the UK’s afterpay divisions, said they welcomed the transition to regulation.

How to buy now, how to pay later has become a $ 100 billion industry

Source link How to buy now, how to pay later has become a $ 100 billion industry

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