Buy Now, Pay Later

There are applications on the market that allow you to pay, by instalment, online purchases and purchases in shops, without commissions for purchasers

In recent times, we have seen that large companies allow financing everything, that is, they allow the customer to buy low-price products (shoes, suits, and consoles, amongst others) and to pay them comfortably, by instalment. As a result of the pandemic, online sales have grown in all sectors and consumers have also been finding new ways of saving. This has increased the specialised fintech on credit payment systems, known as Buy Now, Pay Later (BNPL).

A few years ago, some retail shops introduced the concept of Buy Now, Pay Later, which is not new. In fact, this system allowed the products to be tested before they were paid, so if customers were not satisfied, they could return them. Therefore, customers only paid for products they actually kept.

New Payment Methods

Times change and so do the ways we buy and pay. One of the main benefits of traditional banks is the payment of charges at the time of a card purchase, whether in a shop or online.  This is one of the markets which, in view of the few interests that can be paid by providing loans and mortgages, because of the low interest rates, enables banks to generate income.  However, this market has recently got complicated, as new forms of payment directly applicable to vendors have appeared, and they incorporate the solution of “Buy Now, Pay Later” applications.

The two best known and most widely used applications in the world are that of the Swedish company Klarna and the Australian Afterpay.

The way these applications work is very simple. The user, after choosing a product, when they have already decided to buy it and check out, instead of pulling their card or wallet, pull their mobile phone. The shopkeeper sends a payment request via an email that the customer must confirm or the operation is confirmed by a QR reader. Once the operation is accepted, the acquired article can be kept.

So far, everything is very similar to a purchase made and paid with the mobile payment service of the purchaser’s bank. The difference is that with the system of the Buy Now, Pay Later (BNPL) system, the purchaser can, if they want, choose not to charge the bank account immediately for the purchase amount. This decision does not represent any cost to the user of the BNPL system.

When a credit card payment is made, if the purchaser finds there is no money on the account, the operation is automatically cancelled by the bank and they will have to leave the store without the product. On the other hand, traditional banks charge a fee to the store for the use of their online payment service and also, if the payment is on credit, in some cases, the bank will charge interest to the customer, as well as a card maintenance commission.

Another difference is that the Buy Now, Pay Later apps allow you to fragment purchase payments. The shop receives the total amount of the purchase at the time it is made, but the purchaser can choose different payment options by instalment (one or more payment fees, within a time limit allowed by the application), which will not impose any additional financial burden, that is, no interest or commission. Their cost will therefore be zero.

For the time being, in order to enjoy this payment system, it is necessary to have an account in a bank, as applications do not yet have a bank licence to operate customer accounts.

Competitive Advantage

And how do these applications earn their living if they do not charge commissions or interest to purchasers? Well, they charge a commission to shops, as traditional banks do. The difference is that this fee is less costly than the traditional fee.

Thus, fintech such as BNPL can survive only on this income because it has no major infrastructure costs, no maintenance, no advertising, and few employees, unlike traditional banking, which has very high costs in all these respects. In general, these payment application companies have low costs because they are based on technology. This gives them a competitive advantage over the traditional banking sector, as it allows them to offer services to the establishments in exchange for smaller commissions and, in turn, they do not charge customers any interest for choosing to pay for purchases by instalment.

BNPL applications have revolutionized the small shop industry and the way of shopping.  Millennials are regular users of shopping applications and they value the chance of saving and the convenience at the time of making purchases, such as not paying fees or interests, as well as being able to pay in comfortable quotas. It is proven that, at the time of making a purchase, the price is decisive and, in online purchases, the final decision of keeping a product is taken at the time of confirming the purchase. The purchase is not completed because the purchaser considers the price to be a high-cost blow to their pocket. The possibility of paying for the purchase through BNPL (Buy Now, Pay Later), encourages the consumer to complete the purchase, increases customer loyalty, and provides a better shopping experience.

Buy Now, Pay Later apps are very popular in Australia and the United States and, in the last year, have broken through Europe in full strength.