The trend towards buy now, pay later (BNPL), is causing divisions in the financial services market. Many consumers see it as an easier and more affordable means of paying for products. But there are concerns that it increases the risk of debt, and impacts wider money management behaviour and attitudes.
Microsoft’s plans to embed BNPL functions in its Edge web browser have prompted accusations of greed and a “cashgrab mentality”. The new feature inserts BNPL as a payment method next to the credit card field at checkout, and enables purchases between £26-£750 to be split into four payments over six weeks, subject to approval.
Meanwhile, Swedish fintech Klarna is launching a physical BNPL card in the UK and US - with a waitlist of 400,000 shoppers in the UK - following successful rollouts in Sweden and Germany. The card integrates with Apple Pay and Google Pay, enabling users to opt to pay up to 30 days after purchase.
What is BNPL?
BNPL offerings are becoming a touchstone of changing consumer behaviours in today’s highly sophisticated, digital payments sector.
In-store credit has been possible since trading began, and instalment payments have been an option for some time at online checkouts of some retailers. What has changed is that today BNPL – now estimated to be a £2.7bn industry – is influencing consumers’ choices of products and providers – making a difference to purchasing far earlier in the consumer journey.
BNPL enables consumers to spread the cost of their purchases, paying only a portion of the price upfront, with the remaining cost divided across a predetermined number of instalments and timeframe – usually ranging from 30 days to 12 months. These payments are often interest-free, with a quick approval process.
What the rise of BNPL means for embedded finance
Firms such as Affirm, Afterpay, Klarna, and Zip are already partnering with retailers like Amazon to enable the use of BNPL, and Apple has also announced a BNPL offering.
Meanwhile, mainstream banks are looking for a piece of the action, amid predictions that by 2026, UK consumers will spend close to £40bn a year through BPNL. The BNPL explosion risks cannibalising lucrative credit card businesses and financial service institutions are eyeing interest-free BNPL as a new means of keeping their customers engaged.
Goldman Sachs has already spent $2.2bn (£1.6bn) to acquire GreenSky, a BNPL fintech, focused on spreading the cost of home improvement loans rather than retail. And Barclays has teamed up with Amazon to offer a BNPL payment option called Instalments by Barclays.
Who is using BNPL?
Providing a consumer journey with less friction, BNPL was always going to appeal to young consumers who expect a seamless and flexible user journey, along with those whose finances are tight. Global BNPL use exploded during the pandemic, with recent studies showing the percentage of Gen Zs (21-25 year olds) in the US using BNPL growing from 6% in 2019 to 36% in 2021.
While the world’s billionaires got 54% richer during the pandemic, many of the UK’s poorest families are worse off since 2019, and are turning to credit to make ends meet. BNPL, with no interest, is seen as an easy way to stagger payments.
BNPL is also regarded as a boon to hard-hit retailers. Bain and Company’s recent report found that 57% of merchants questioned had seen increased checkout or basket conversion on their website due to BNPL.
But there are fears that BNPL is a Trojan horse, helping consumers spend more, while encouraging a reliance on debt and unsustainable spending.
What BNPL means for young investors
Advertising and the use of influencers to promote BNPL products, is drawing many young people into the market. Research by money.co.uk shows that one in eight (13%) of 18–24-year-olds surveyed said influencers played a part in their decision to shop now and pay later.
While BNPL provides young people with a simple way to spend, it also instils a short-term view that could have a long-term impact on how they manage their finances. If living beyond their means becomes a part of the money culture for younger generations, it will become increasingly difficult for them to understand the importance of investing their money for the future.
There are also fears that many young people do not fully understand the use of BNPL and its terms and conditions. The same Bain BNPL report reveals that 58% of BNPL users surveyed aged 18–24 and 49% of those aged 25–34 agreed with the statement, “BNPL services… do not qualify as debt because they don’t charge interest.” This is despite the report also showing that 40% of BNPL users have a university or higher level of education.
Alice Tapper, founder of personal-finance website Go Fund Yourself, told Bloomberg Wealth that she first saw a Klarna ad on the London Tube and only realised later it was a credit product. “Buy now, pay later is being dressed up as a glamorous payment option,” she said. “Its true nature as a credit or debt product was really pretty difficult to actually decipher.”
BNPL can quickly become expensive if consumers don’t make repayments on time. If debt is not cleared by the end of the deferred payment end date, some providers will ask for a settlement fee, or a lump sum of interest may be added to the debt. Consumers can also be charged late payment fees on top, and missed payments could be recorded on credit reports and affect consumers’ credit scores.
In February 2021, the UK government announced it would bring unregulated, interest-free BNPL products into regulation, following FCA concerns. A consultation into BNPL closed at the beginning of January 2022, and subsequent regulation is expected.
What can digital wealth managers do to support customers?
For banks and wealth managers, keeping potential investors within their ecosystem with digital channels and educating them on the benefits of long-term investment is key.
Advice can be part of wealth management discussions with those likely to use this system. This could be through financial advisers, who hold high levels of trust with their investors, or by using personalised digital engagement to help explain the risks associated with BNPL and the consequences of a debt culture.
Financial firms can also offer services to investors through a wider ecosystem of propositions, which are more fully understood. They can support customers with verification checks through regulated channels, and help customers make effective, balanced decisions on BNPL.
If you’re a bank or digital wealth manager looking for support on how to build savings and investment propositions that help customers make more of their existing money, get in touch.