Are ‘Buy Now, Pay Later’ Services Helpful or Harmful to Retail?

In recent years, “buy now, pay later” (BNPL) services have surged in popularity, offering consumers the flexibility to make purchases and spread payments over time. While BNPL is touted as a convenient solution, the reality for some users has been far from rosy.

Essentially, BNPL allows shoppers to split their purchases into installments, often with minimal or no interest. For many, especially those facing financial constraints, this option provides a lifeline when cash is tight. Tia Whiteside, a 27-year-old behavioral analyst, initially saw it as a convenient way to manage expenses. However, her experience quickly turned sour as she found herself accruing debt totaling thousands of dollars.

“I was just seeing my paycheck continually eaten up,” Whiteside said, “and I was like, ‘Where’s my money going?’”

The appeal of BNPL transcends income and credit levels, with users drawn to its promise of financial flexibility. Yet, as the popularity of these services has grown, so too have concerns about their potential pitfalls. Research has shown that BNPL users tend to overspend, often racking up additional fees and interest charges. Despite efforts to regulate the industry, the lack of uniform reporting to credit agencies complicates the assessment of borrowers’ financial health.

Social media platforms like Reddit have become forums for disillusioned BNPL users to share their stories and caution others against falling into the same trap.

A report from the Consumer Financial Protection Bureau published last year indicates that most “BNPL borrowers had higher credit card utilization rates and lower credit scores” than non-BNPL borrowers. Per NBC News, “Many appeared to be leaning on the installment loans while also shouldering high rates on revolving credit card balances.”

Additionally, the report found that certain demographic groups, including Black and Hispanic consumers, are disproportionately impacted by the allure of BNPL. Female consumers were also 35% more likely than average to use BNPL services.

Amy Baird, for instance, found herself drowning in debt after years of indulging in BNPL for luxury purchases. “It caught up to me,” she told NBC News. “I had put myself in a pretty big hole,” she said, noting that she was able to find support in a subreddit focused on shopping addiction.

Critics argue that BNPL platforms, with their seamless payment processes and enticing promotions, enable impulsive spending behavior. The ease of clicking “purchase” can override rational decision-making, particularly during moments of fatigue or stress. While some platforms tout features aimed at promoting responsible spending, questions linger about their effectiveness in curbing excessive borrowing.

In response to mounting scrutiny, lawmakers have called for increased oversight of BNPL services to protect consumers from exploitation. However, the allure of convenience continues to lure many into the BNPL fold, despite the potential risks.

Meanwhile, in parts of Asia, BNPL has been booming in recent years, offering consumers a flexible payment alternative. According to Euromonitor International, the introduction of BNPL in 2018 sparked this surge, with providers now focusing on strategic partnerships, business model innovation, and ecosystem development.

Southeast Asian countries like Indonesia, Malaysia, the Philippines, Thailand, and Vietnam, with their sizable unbanked and underserved populations, present fertile ground for BNPL providers. The Philippines and Indonesia, in particular, boast unbanked populations of 76% and 67% respectively, with similar figures in Vietnam (47%), Malaysia (40%), and Thailand (25%). BNPL services have found appeal in bridging this financial gap.

Strategic partnerships have played a pivotal role in expanding the reach of BNPL services in the region. Collaborations with card operators, e-commerce platforms, digital wallets, and insurance companies have significantly broadened the user base and usage of BNPL services. For instance, partnerships like Atome Philippines’ collaboration with Mastercard and Traveloka PayLater’s cooperation with Bank BRI and Visa have propelled market presence and service utilization.

To overcome revenue and profitability challenges, BNPL business models have undergone a transformation. Implementing consumer charges and optimizing repayment terms have emerged as strategies to enhance revenue streams and operational efficiency. Shortening installment periods and exploring alternative funding sources, like acquiring banks or transitioning into digital banking operations, have become essential for long-term sustainability.

Despite the opportunities for growth, the absence of well-defined regulations in emerging markets poses challenges, particularly regarding credit risk. However, this environment also presents opportunities as BNPL gains traction among younger, unbanked, and underserved populations.

Euromonitor International suggests that BNPL could potentially emerge as the primary provider of financial products and services in these markets by understanding their unique needs and preferences. By positioning themselves as pioneers in shaping the financial landscape, fostering financial inclusion, and capitalizing on growth potential, BNPL players can seize the immense opportunities presented by these promising markets.