Going Down the ‘Buy Now, Pay Later’ (BNPL) Rabbit Hole

Discover the advantages and disadvantages of the 'buy now, pay later' (BNPL) megatrend, including market opportunities for fintech companies

Photo of a dark hole leading up to Canary Wharf, London (the banking district)

There’s no doubt that ‘buy now, pay later’ (BNPL) services like Klarna or Affirm have taken off in recent years.

The convenience of paying for items without worrying about paying immediately is likely why they’ve become so popular.

This article takes a closer look at both the pros and cons of BNPL services to examine whether or not they live up to the hype.

Why has BNPL become so popular?

There are a few reasons why BNPL has become so popular in recent years.

First of all, as mentioned before, the convenience factor is huge. It’s much easier to pay for something over time than to come up with the total amount all at once.

Secondly, BNPL services often have very low or even 0% interest rates for a certain time. This offer makes them appealing to people who want to make a large purchase but don’t want to pay interest on it.

Lastly, many BNPL providers have started partnering with major retailers and even restaurants, making it easier to pay for products and services in instalments.

“For me, Buy Now Pay Later is the current megatrend when it comes to FinTech payment services these days. Klarna, Affirm, or Afterpay have all made it socially acceptable,” said Professor Dr. Stefan Stein, Founding President and Professor for International Business Management at GISMA Business School in Potsdam.

He added, “Consumer loans or instalment loans – how awful does that sound? Loans that you have to apply for. Through a boring bank-like institution. Thanks to Klarna, debts now become sexy: a fancy shirt for 120 euros or the same shirt for 11 euros a month for the next 12 months. Instalment loans made simple. TikTok, Instagram and Facebook are overflowing with offers. The estimated market potential is huge. Some estimate that by 2026, the global market for BNPL will have more than quadrupled to around $1 trillion in just five years.”

No wonder BNPL providers have raised billions of dollars in funding from investors. From a fintech company’s perspective, BNPL is an attractive business model because it allows them to make money from interest and fees charged to users.

What are the disadvantages of BNPL?

In addition to the advantages of BNPL, there are also some disadvantages associated with the technology.

Firstly, the market is saturated with BNPL providers, making it difficult for users to know which one to choose or for fintechs to establish innovative business models.

Different companies offer many different interest rates and terms; it could confuse people trying to compare them.

Secondly, people can overspend and lose track of their finances if they’re not careful.

With BNPL, people can easily buy things they wouldn’t be able to afford if they had to pay for them all at once. Debt could then start overspilling if they lose track of it all, and late payment fees could start racking up if people aren’t mindful of their spending.

Lastly, the lack of regulation in the BNPL industry could pose a risk to both users and providers. There are no fundamental regulations around how BNPL providers operate, which means that things could change suddenly and without notice.

“In any case, the development will soon bring the regulator into play. Young people especially are buying what they can’t really afford. On social media, many are making fun of their debts, which they will probably never be able to pay back,” added Stein. Many post screenshots of their balances at Klarna – often with four-digit amounts of debt and making fun ‘I’m a regular customer at collection’. I think we will soon be having a discussion about the extent to which fintech companies (must) contribute to responsible lending. This topic certainly won’t be very sexy then.”

Only time will tell whether lawmakers will implement regulations and how that will affect the BNPL industry. For the time being, it’s a good idea to be aware of the pros and cons.

Embedded finance as an opportunity for BNPL providers

BNPL providers have an ample opportunity to offer integrated white-label payment options at the checkout in the race to gain market share.

By partnering with retailers and other businesses, fintechs can act as the infrastructure for their partners to provide their own BNPL services, along with added options like loyalty programs, customer financing, and even business loans.

An embedded finance solution will enable BNPL providers to offer these products and services under their own brands, which will help them have better analytical insights and build a stronger relationship with customers.

According to Vilve Vene, Founder and CEO of Tuum, “There’s a monumental industry shift happening as more consumer-facing brands deliver financial services to consumers, making their customer journeys more seamless and boosting brand loyalty. Embedded finance is high on consumer wish lists too – 42% of those we surveyed were interested in taking out products like insurance or BNPL at the checkout for purchases rather than having to source finance separately from a bank or provider.”

She added, “Banks are alive to this opportunity. 82% see offering products like loans and insurance via third parties, like retailers, as becoming a key new revenue stream for them. Crucially, becoming ‘infrastructure providers’ as well as offering traditional services is helping banks remain relevant as brands continue to own customer relationships.”

As an opportunity, this could be a way for BNPL providers to expand their reach and tap into new markets.

Another BNPL opportunity is to accept cryptocurrency payments

Despite being around since 2009, cryptocurrencies are still in their infancy and have yet to be widely adopted.

However, a growing number of businesses are beginning to accept them as payment.

BNPL providers could also start accepting cryptocurrency payments and offering financing options for those looking to spend crypto.

This option would open up a whole new market for BNPL providers and give them a way to stand out.

According to Anthony DiMarsico, CEO of Banxe, “Digital payments and online transactions have become embedded in everyday life, so it’s essential the fintech industry evolves to offer more digital services for all currencies. The future of digital payments lies in uniting cash and cryptocurrencies. By bridging the gap between new digital currencies and traditional cash systems, this opens a world of possibilities in the fintech industry and introduces cryptocurrencies into everyday life.”

He added, “Digital currencies should be easily accessible for everyone and the latest fintech platforms give users the opportunity to buy, sell and trade crypto quickly and simply in one place, removing the shroud of mystery surrounding the industry. There are many exciting things on the horizon for the fintech market, but it time to make these new innovations accessible for all.”

By accepting cryptocurrency payments, BNPL providers can tap into a new market of users who may not have otherwise considered using their services.

The bottom line

As the BNPL vertical advances, providers have several opportunities to capitalise.

By partnering with retailers, offering embedded finance solutions, and accepting cryptocurrency payments, BNPL providers can expand their reach and gain a competitive edge.

At the same time, it’s essential to be aware of the potential risks involved in these services and the lack of regulations.

BNPL providers need to make sure they can handle any chargebacks or fraud that may occur.

Fintechs must also inform customers about the terms and conditions of their services so they know exactly what they are getting themselves into.

Overall, BNPL services can be an excellent way for customers to finance their purchases, but there are both pros and cons to consider.