When looking at how consumers make purchases, it can be seen that the Buy Now Pay Later (BNPL) service is ubiquitous. Rather than buying goods or services for an immediate payment, this payment method enables consumers to purchase goods or services with the promise to pay later. This reverse model payment continues to be very popular, especially among the younger generation who cozy up to such flexibility in terms of payments. Consider this post as a primer to the BNPL strategy and its effects on consumer spending and financial planning while discussing its advantages and disadvantages.
What is Buy Now Pay Later: Further Explained
Buy Now Pay Later services allow their users to shop for an item and take it home without having to pay the full price. This option is most popular with consumers who do not want to pay with a cash on delivery feature or do not have the financial means to do it because the payment can be divided into several smaller amounts and paid in installments without interest.
BNPL segment is prematurely estimated to reach USD 11.16 billion by 2024 and to maintain a CAGR of 21.8% as per reports. With such promising estimates, evolution of e-commerce penetration, consumer curiosity towards better financial avenues, and loss of faith in credit systems serve to be facts that fuel the market surge.
The Effects on Consumer Behavior
Purchasing Behaviour
Widespread availability of BNPL services has fostered a change in customer purchasing behaviour through the ease they deliver. There is a higher likelihood of clients pursuing business transactions when they use BNPL services when compared to a BNPL free alternative, the likelihood in percent rising from 17% to a 26%[8]. On the other hand, there is a possibility that consumers end up spending more money when they opt for such services, BNPL has been seen to increase the average basket size by around 10% when compared to normal pay modes[8].
The analysis shows that this change is indicative of the fact that BNPL systems promote consumption of non-essential goods among their clients. Let us take the case of a young freelance graphic designer, Aisha, who purchases a laptop using a BNPL service. Rather than using a credit card with hefty interest charges or waiting for several months to save up, she chooses a BNPL plan that allows her to pay in stickers. This not only assists Aisha in acquiring tools which are vital in her career but also enables her to make purchase decisions on things she would have otherwise delayed buying.
Approach to Finance
Budgeting when it comes to this type of plans is complex and hard to understand as Americans have the obvious tendency to buy now, pay later. It is easy for consumers to accumulate debts due to easy availability of delayed payment facilities comfortably enticing users into overspending. For instance, James, an event coordinator fresh from college may want multiple work event clothing; and a new gadget for his home office. With the availability of BNPL, James may end up buying clothes and gadgets without considering what the payments would cost him on a monthly basis.
Additionally, the absence of policies detailing the operations of the BNPL providers might be a disadvantage. Unlike other conventional methods such as the credit card which are bound with some conditions the BNPL lenders have few norms to follow. In such a scenario, a borrower is likely to be caught off guard with some sudden extra charges when they have borrowed through various providers and have a percent plan to repay.
E-Commerce in Context of BNPL
The increase in use of BNPL services can go hand in hand with the global increase in online shopping. With the global pandemic pushing the world towards more clicks than bricks, more and more shoppers are on the lookout for easy payment options to improve their shopping experience. The merchants also see the good side of too. It has been observed that upon enabling these options, merchants have higher conversion rates and larger average order values[2][3].
Take the case of Marco a jewelry store owner who sells customized jewelry through his online store. When Marco includes the option to buy through BNPL at the checkout means customers are ready to buy even expensive products which they would otherwise not have purchased. Not only does this strategy increase the sales, it also makes customers happy as they can pay for items later.
Pro and Cons of BNPL Services
Pros
- Quick Access: Consumers are able to get instant access to the items without having to spend any money upfront.
- Control of Spending Plans: Users have the convenience to stretch payment over a set period of time thus eliminating hefty monthly payments as a result of debt.
- Comfort with Payment Options: This option allows consumers to buy more than they would have with conventional means since there’s an option to make installments.
Cons
- Encouragement to Spend More: The BNPL services might influence a consumer to make unreasonable purchases, due to how easy the process is.
- No Controls In Place: As these services don’t have a lot of controls associated with them, unlike loans, consumers may run into a situation with unclear fees or picking options with undisclosed amounts.
- Payment Methods and Credit Management: Not all BNPL facilities report to a credit bureau, a few do, and missing payments can cause other cross financial behaviors that harm consumers on credit.
Real Illustrations Based Scenarios on How BNPL Helps
To aid in comprehending the consequences of BNPL services on a consumer’s behavioral spending and finance management let us delve into two conflicting scenarios involving two individuals from diverse worlds.
Scenario 1: How priya Encashes the BNPL system
Priya has been aspiring to be a chef for the longest time and wishes to start her own business in catering services as she has a vision for it. She opts for BNPL services which enable her to get high quality kitchen equipment which is required for her cooking and food preparations. Choosing this payment method enables the aspiring chef to save money for her career without disturbing her cash flow too much.
She goes on to set reminders to herself for each ‘due date’ installment and makes sure she allocates a fraction of her income on a monthly basis for these payments. As a result of this approach, Priya manages to sustain financial stability alongside building the business.
Scenario 2: How Leo Goes Overboard Using BNPL Services
Moving on to leo now, he is a college student and has the habit of using bnpl services quite often, textbooks, concert tickets and so much more, he goes on to use these services. While these Services may prove useful, Leo learns the hard way that they need to be intended, or else life will get out of control quickly.
This casual spending quickly translates into multiple repayment plans for him which he starts to lose track of, and because leo has no planned budget or a clear understanding of what he owes in total, he starts to miss payments and is late in paying outstanding balances which in turn gets him charged some hefty late fees. Because of this, he was unable to make sound financial decisions while studying which resulted in him accruing further debt.
Conclusion: Treading the Uncertain Waters with Care While Moving into the Future
Services like Buy Now Pay Later are becoming the norm which is a dramatic change in consumer finance which offers both good and bad for today’s shoppers. With these new ways of making payments, most notably with the younger generations, it is important for consumers to be careful with how they use them.
To comprehend the way that BNPL strategies affect people’s spending behaviors and personal finances can help individuals such as Priya and Leo to make right choices regarding their purchases. In addition, consumers should be able to work through the temptation of the moment and with good budgeting practices make use of them without any problems.
In an economy which is mostly online in nature where being able to adapt is the most important aspect, being able to use services like this one will be very useful in enhancing the financial wellbeing of a person.