What is BNPL and why is it important?

The buy now pay later (BNPL) is an age-old concept, revived in a trendy way by Fintech companies across the world. To put it simply, it means a customer taking home their purchase but paying for it on a later date.

In BNPL, a customer buys the product and commits to pay for it later, till that time, it is interest free. If he misses that date, he is supposed to pay the interest for the entire period. Suppose Mr X (imaginative person) buys an iPhone on 31 March 2021. He commits to pay for it by May 31. If he pays before May 31, this would be an interest-free purchase for him. If he pays later than May 31, he would have to pay the interest for April and May as well, along with interest for the days he delayed his payment.

After the COVID-19 pandemic set in, the finances of middle class got messed up. With this, there was transformation in the way the people spent their money. Fintech firms started coming up with more and more BNPL set-ups.

According to various surveys, the BNPL apps in the market have seen the number of their monthly active users (MAUs) soar by 186% year-over-year (Y-on-Y) in 2021. In the same period, the number of apps installed rose by 46% Y-on-Y.

Experts suggest that the value of global BNPL transactions is set to surge past US$680 billion by 2025 from US$285 billion in 2018. Similarly, Bank of America pegs that the market for BNPL apps will grow 10x to 15x in the next four to five years. Bank of America pegs the BNPL value between US$650 billion and US$1 trillion by 2025.

So, what is BNPL?

They are also called as point-of-sale installment loans. The BNPL arrangements have been picking up and becoming an increasingly popular payment option -- especially when e-tailing space is becoming prominent. By using BNPL financing, it can be convenient for consumers, but there are some potential downsides also associated with it.

There are several like, including Klarna and Affirm, which already offer buy-now-pay-later financing on the purchases done from participating merchants. PayPal has also introduced its own BNPL program. Some credit card issuers, such as American Express, have also set up similar financing options.

Are they like credit card EMIs?

They both sound similar. They both involve delayed payments. Yet, BNPL is very different from making the purchase using a credit card. When a customer uses a credit card to pay for things, you're only supposed to make the minimum payment due on the card each month. Interest gets charged on the remaining amount (which would not be charged if you have used a card with a 0% introductory APR) until you pay it off in full. But you can carry a balance indefinitely in case of a credit card.

In contrast, BNPLs, in most cases, do not charge interest or fees. But they have a pre-set out repayment schedule – usually several weeks or months. The customer is told at the beginning what he or she will need to pay each time – which is usually the same amount. This kind of financing is comparable to any other non-secured personal or consumer loan.

What do you need to check while entering a BNPL agreement?

There are four important things that you should consider while you enter a BNPL arrangement. First, like any other financing arrangement, it is important to understand the repayment terms you're agreeing to. Also, it is necessary to understand how your payments will work, which can help you plan for them in your budget. Also, the borrower should keep in mind that while they may be approved for a 0% interest BNPL, that's not always guaranteed. Finally, consider return policies and how BNPL may affect your ability to return something you have purchased.

What are its pros and cons?

BNPL agreements allow consumers to pay for things over time without interest being charged. And it's way easier to get approved for this type of financing even with a low credit score, since they are somewhat sub-prime in nature. These loans don't add to your credit card debt and affect your credit score. On the flip side, getting these loans and paying them off doesn't help you with good credit score mostly. A customer also misses out on any perks, like cash-back or rewards points that credit cards offer.

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