Buy Now, Pay Later!  The New Layaway

With the holiday season upon us, there are more opportunities for consumers to utilize payment options that do not require full payment for goods and services at the time of purchase. Before credit cards became popular, a similar option was called "layaway." However, with layaway, the merchant would not release the item(s) until the full purchase price was paid. Once the total payment was received, usually over several months, the purchased item(s) would be released to the consumer. This eventually went away due to the increased use of credit cards, and it was not a profitable business model. Items were taken out of circulation and held but were ultimately never purchased.

Today, Buy Now, Pay Later (BNPL) companies are creating a fascinating option in modern consumer finance! A few major companies include Afterpay, Klarna, PayPal, and Affirm. Bankrate stated that nearly 2 in 5 Americans have used at least one BNPL service. Juniper Research estimated that global users were 350 million in 2022 and will grow to 900 million by 2027. With BNPL, consumers can purchase and receive goods or services immediately and pay later with interest-free options. This is what makes it so attractive and revolutionary! The BNPL companies usually offer a few pay-later options, such as four interest-free installment payments, paying within 30 days interest-free, or paying over several months, potentially with no interest for shorter timeframes and with interest for longer payment periods. So, how does this work?

The BNPL companies operate as middlemen between the merchants and the consumers. After shopping, at the time of checkout (online or in person), the consumer will select the BNPL company; a soft credit inquiry is run at this time (it doesn’t impact the credit score). If approved, a plan will be presented to the consumer, and the BNPL company will then pay the merchant the full price of the goods and/or services, less a fee of 2% to 8%. Seamlessly, the merchant will complete the transaction and ship the merchandise immediately. The terms and agreements will depend on the payment plan selected and approved. Additionally, the terms and agreements will vary depending on the plan and the company; therefore, it is important to read and understand them.

Most Popular Interest-Free Plan Options:

• 4 Interest-Free Payments: The initial payment is due immediately, usually 25% of the purchase price, and the remaining three payments are due every two weeks

• No Payment for 30 Days: The consumer can pay the full amount within 30 days, interest-free

• Larger Items Plans: For big-ticket items, some companies offer  up to 12-month interest-free plans if paid in full by the end of the term

• Pre-approved virtual cards: limit depends on credit health and past payment history with BNP

In all cases, the consumer must have a valid credit card or debit card upon plan approval for auto-payments.

Why would the Merchants work with BNPL companies?

Increased Sales: By providing flexible payment options, customers are more likely to complete a purchase, especially for larger items

Reduced Cart Abandonment: Offering BNPL can incentivize customers who might hesitate due to upfront cost to finalize their purchase

Improved Customer Experience: BNPL's user-friendly interface and seamless integration with popular E-Commerce platforms make it convenient for customers to use 

Expanding Customer Base: Attracting younger demographics who are more likely to use BNPL services 

Risk Mitigation: BNPL handles credit checks and debt collection, reducing the merchant's exposure to bad debt 

Brand Perception: Integrating with BNPL can be seen as a sign of innovation and keeping up with technology

While merchants might absorb some costs due to BNPL fees, the overall benefits, such as increased sales and customer satisfaction, can outweigh these expenses. 

As with any financial decision, it is important for the consumer to operate within a budget. Although a BNPL plan can help smooth cash outflows and allow the purchase of some items, especially larger ones, without a large initial payment, if not planned and used properly, there could still be unwanted costs like late fees and very high interest rates on late and/or unpaid balances. 

The bottom line is that there still has to be accountability for making good financial decisions and not overspending.

By Ylanda T. Wilhite

Sources: NPR, Chargeback Gurus, Consumer Financial Protection Bureau, Bankrate, Juniper Research