While the pandemic prompted more people than ever to shop online, it also made money tighter than ever for many. This combination lead to the rise in popularity of Buy Now Pay Later services. While each service operates a bit differently the core idea is the same - shoppers can split payments into bi-weekly or monthly installments rather than pay for their entire cart upfront. The items arrive as usual although they haven’t actually been paid for yet.
Companies such as Afterpay, Klarna, and Sezzle, which offer the service, report significant user growth since March. According to Huffington Post, about 987,000 users signed up for Klarna between March 1 and July 30, a growth rate of nearly 200% year-over-year, while Afterpay gained one million customers between March 1 and May 20.
Once payments done through BNPL are approved they are automatically deducted from the user’s payment method of choice. The companies will send an e-mail or text alerts, notifying when payment due dates are coming up. What makes these installment plans appealing is that they’re interest-free, and the customer is only charged a fee if a payment isn’t processed successfully (i.e. they don’t have enough money in their bank account or their credit card is maxed out).
These late fees are one of the ways BNPL companies make their money. Afterpay, for example, can charge US customers up to 25% of the order value in late fees. In Klarna’s case, up to $7 plus the unpaid amount are added to the next scheduled installment if a payment doesn’t go through.
The main bulk of their revenue, however, comes from the retailers. BNPL companies charge retailers transaction fees for each purchase. That way, they get a cut from the cart of each customer using BNPL services. “Essentially, they rely on people buying more than they normally would, and retailers pay them for the promise of impulsive customers,” explained Lauren Anastasio, a certified financial planner with SoFi.
To start on a positive note, some experts see these services as important and beneficial, especially for young people, and those who don’t have a credit card or even a credit score. Many young adults, for example, have sizable student loans, and the last thing they need is to pile on open-ended credit-card debt.
1. BNPL could harm your credit score through missed payments, but not build it. Anastasio explains that although these programs are advertised as “interest-free” that can depend on your payment schedule and credit score. Some BNPL companies perform hard credit checks and report missed payments to credit bureaus, which could affect your score. Payment activity, on the other hand, isn’t reported. This is not always the case, however, which is why it’s extremely important to read and understand the terms of the plan you’re using.