A newer financing method known as “buy now, pay later” is becoming increasingly established abroad. It enables consumers to finance individual purchases without paying interest or fees. Given that the concept is still relatively unfamiliar and not widely used in Slovenia, this article examines its main advantages and disadvantages.Today, consumers can purchase almost any type of product in instalments, from a new computer to a simple sports shirt. Traditionally, consumers have relied on credit arrangements for such purchases. More recently, however, an alternative financing model known as “buy now, pay later” (hereinafter: BNPL) has become increasingly popular.
What is BNPL?
BNPL is a form of instalment payment in which the customer does not pay for the product directly at the online or physical checkout. Instead, the selected BNPL provider pays the merchant on the customer’s behalf. The customer then repays the amount to the BNPL provider in instalments over shorter weekly or monthly periods, in accordance with the applicable terms of use.One of the main advantages of the model is that, provided the instalments are paid on time, it functions as a form of financing that does not require the consumer to pay interest or fees. With appropriate personal financial management, BNPL can therefore provide an efficient and free method of spreading the cost of a purchase over a longer period.How, then, do BNPL providers generate revenue? Instead of charging consumers directly, they receive a share of the revenue from goods sold by merchants through the BNPL service.
Individual credit risk
The underlying nature of a BNPL service is the provision of credit to an individual. BNPL providers may therefore use a system for assessing the consumer’s credit risk. This allows them to obtain information about the individual’s financial behaviour and decide whether to approve or reject the use of the service.Credit-risk assessments generally involve collecting and checking financial information held by organisations such as banks, payment service providers and public utility providers.There are two main types of credit checks: a “soft credit check” and a “hard credit check”. In a soft credit check, the provider reviews certain information contained in the individual’s credit report but does not conduct a comprehensive assessment of their credit history. This type of check does not affect the individual’s credit score or future credit applications because it is not visible to other companies.A hard credit check, by contrast, is recorded in the individual’s credit report. It is therefore visible to other companies and may affect the individual’s credit score and their chances of receiving credit in the future.BNPL providers generally use soft credit checks. Their simplicity, speed and limited consequences contribute to the attractiveness of BNPL services. However, some providers, such as Afterpay, may not conduct either type of check. In such cases, they may request only general information, including an email address, telephone number, date of birth, payment method and billing address, and make an immediate decision.Longer repayment arrangements extending over several months or years must be distinguished from the BNPL services discussed above. BNPL providers may also offer such financing, but these arrangements usually require a hard credit check because they tend to be more strictly regulated and involve a formal credit agreement.Once an individual has been approved for a BNPL service and uses it, compliance with the terms of use and timely repayment of instalments become essential. In the event of late or missed payments, BNPL providers frequently charge late-payment fees. Other consequences may include additional penalties, the transfer of the debt to a debt-collection agency and the reporting of the unpaid amount to a credit reference agency, which may negatively affect the individual’s credit score. (2)Consumers were expected to spend USD 680 billion through BNPL services by 2025, representing almost double the USD 353 billion spent by 2019. (3) It is therefore unsurprising that startups seeking to succeed with the BNPL model have emerged around the world. Some of the largest providers include Klarna, Afterpay and PayPal.By way of illustration, all three providers offered a BNPL option involving payment in four instalments at two-week intervals, while Klarna also offered the possibility of paying the full amount within 30 days after the product had been dispatched. (4)
Problematic aspects of BNPL
Despite its advantages, BNPL also presents several potential concerns. Many BNPL providers focus their marketing activities on younger generations, who currently represent the largest group of users of these services. (5)Carefully designed social-media marketing and visually appealing applications may contribute to a change in how consumers perceive debt. (6) In this context, it is worth noting that Klarna alone had more than seven million users in the United Kingdom. (7)Excessive use of BNPL services, together with potential late-payment fees and other penalties, may ultimately lead to widespread indebtedness among younger and less financially informed users.The increased risk of debt is also linked to the relatively limited regulation of the BNPL sector. Less rigorous creditworthiness assessments allow providers to approve users more quickly. Consumer rights may consequently receive less protection and may, to a certain extent, depend on how each individual BNPL provider treats its users.Greater regulation of the sector can be expected to introduce stricter conditions for the approval of BNPL services and stronger protection for consumers.
Conclusion
Companies may increase sales and revenue by offering BNPL financing for their products. This option may attract customers who would otherwise abandon the purchase or be unable to afford it at that particular time.For consumers, BNPL provides an additional and generally free financial tool for spreading the cost of a purchase over a longer period. Nevertheless, as BNPL services become more widely available in Slovenia, consumers should use them carefully and review the applicable terms and conditions before committing to a particular service.