Understanding the Risks of ‘Buy Now, Pay Later’

Buy now, pay later

BNPL is a type of short-term consumer credit. It is often characterised by:

• No additional costs for consumers
• Low cost purchases
• Low access barriers
  
  There is no creditworthiness assessment or a simplified assessment.
• Speed
  
  The payment almost always happens instantaneously.

Not the same as other purchases in instalments

‘Buy now, pay later’ has several peculiarities compared to traditional means of consumer credit. This is how it works: at the time of purchase, the platform that offers the payment service pays the whole price of the product immediately to the seller - applying a commission. This allows the platform to earn commissions and sellers to expand their sales. However, consumers have the advantage of dividing the payment into multiple instalments without interest. Consumers are not subjected to checks on their ability to repay the debt. BNPL therefore offers an extremely easy and fast access to financing.

The use of BNPL is growing. The service is offered by several companies, such as the Swedish Klarna, the Australian Afterpay, the Italian Scalapay and the Japanese Paidy. Each firm has its own terms and conditions, but generally the platforms operate according to similar procedures, offering zero-interest payment plans for a variety of purchases. The services attract many younger consumers, who are familiar with digital payments and are may not have a fixed income. BNPL can therefore be an alternative to traditional consumer credit, to which many young people will not have access.

The risks of ‘Buy Now, Pay Later’

BNPL services are designed to make online payments easier, but are in fact a type of loan. It is therefore important to also consider some of the risks of this payment method:

• It is easy to lose control in monitoring your expenses under the pressure of intensive advertising. Beware of making impulse purchases and buying things that are not really needed.
• BNPL paying platforms add in a third party to the relationship between buyer and seller, which may complicate the process of obtaining a refund if products do not arrive or are defective.
• The current lack of regulation regarding this new phenomenon means problems may arise both before and after the purchase is made, in particular if pre-contractual information is not sufficiently transparent.
• Penalties applied in case of non-payment or delay in the repayment in instalments are generally high. This can substantially increase the final amount that is to be paid back.
• If the payment service is offered by a bank or financial intermediary, supervised by sector authorities, consumers are protected by stricter rules (more specifically: the rules on banking transparency). In this scenario consumers have the right to receive correct, clear and comprehensive information that help them understand the characteristics and risks of the contract. This also simplifies comparing the service to other payment services in terms of economic conditions, fees and interest to be paid in case of delay, the right of withdrawal and the available means of out-of-court protection.