The most recent model of Airpods was released on the eve of your teenager’s birthday. You know that they’ve been pining for new headphones to match their iPhone. It’s late, and you need to decide what you will buy.
The Apple Airpods Max looks alluring, sleek, and perfect for your tech-savvy teen. You scroll through the details of its impressive features. These kinds of headphones usually go for $100 or $200 right?
The price beams up at you as you reach the end of the page: $549.99. Incredulous. That seems a bit much for a high-schooler, considering the thousand-dollar phone they already have.
You browse different websites in search of other (cheaper) options. You come across the same Airpods Max on a different retailer site. The price remains the same. However, an additional description reads, “Starting at $46 a month with Affirm. Learn more.”
This retailer you’re looking at uses a “buy now, pay later” company to offer customers an alternative payment option: Split the price across months to pay for the item. No interest, no fees. It seems too good to be true, but it works.
You decide to use Affirm, the “buy now, pay later” provider, to buy the Airpods Max. You keep in mind the conditions you’ll make for your teen when you gift them their spanking new headphones. If they break or lose the Airpods before it’s fully paid off, then they will be in charge of paying the rest of the purchase from that month on. It seems fairer than just dropping half a grand on headphones.
As you watch the first payment of $46 deduct from your account, you can’t help but wonder, was this a reliable way to pay?
Buy Now, Pay Later’s Takeover
The bulk ruling of credit card usage over cash brings us to the brink of a cashless society. While debit won’t upturn credit cards anytime soon, are the big credit players watching out for the newer competition?
A new way of credit is emerging out of the woodworks. Buy now, pay later (BNPL) allows consumers to use short-term financing to buy big-ticket items. It’s a method used to cover commodities like hotel room stays, technology, and luxuries.
How BNPL works is simple. The BNPL financer, a third-party company, will pay for the purchase in full. Then, the customer will agree to pay back the financer in installments over time.
The process is straightforward, and the main players are catching on. Amazon is utilizing the BNPL company Affirm to offer clients more for less. Understandably, this new loan practice is facing scrutiny as its popularity rises.
You may have heard of these “buy now, pay later” providers.
- Affirm;
- Afterpay;
- Klarna;
- Paypal Pay in 4;
- Sezzle;
- Splitit.
How Credit Has Evolved
General Motors spurred on the credit movement in the midst of the Great Depression. The General Motors Acceptance Corporation dealt out financing for GM car purchases. Why? Because the greater majority didn’t have the money to drop on an automobile all at once.
Americans eagerly paid down payments so that they could drive the coveted cars. No longer were these luxuries exclusively for the rich. The average Joe could wheel around town just by handing in installments over time.
At the same time, banks let only the wealthy take out short-lived loans. The rest of society had to borrow in unsafe ways. However, GM’s credit program’s popularity prompted some to set up financial firms specializing in short-term financing. The working class now had access to financing through these firms that they never had before.
GM’s car loans and other lenders created a disruption in the traditional world of financing. Similarly, small start-ups like Affirm and Klarna are appealing to the greater population who may not qualify for or afford credit cards. Now that the “buy now, pay later” concept is gaining speed, will it likewise upend credit card culture?
Legalities and Consumer Health
Both the rise of loans during the Great Depression and in current times have caught some legal snags. Across the world, BNPL regulations must morph to each country and state’s unique financial laws. Furthermore, each BNPL provider operates differently from the other. Some report to the credit bureau or charge late fees while others don’t. There is no one-size-fits-all solution to regulating these companies.
The full development of BNPL will take time. A major turning point for the industry was when the BNPL provider Afterpay was confronted by the DBO for illegally lending under California regulations. This was due to what the DBO thought was an intentional skirting around disclosing conditions that caused many consumers to lose money to late fees for missed payments.
Afterpay agreed to operate with a California lending license. The same went for BNPL company Sezzle, which the state initially denied a license.
Why the fuss over BNPL’s impact on consumer financial health?
The major concerns over paying fixed amounts over time include its widespread availability. It doesn’t take much to qualify for BNPL and companies don’t issue hard credit-checks. This leads to many overusing and underestimating how buying and paying later affects their finances.
Furthermore, BNPL does not have the same dispute tools as credit cards do. It’s more likely for clients to lose a dispute against a provider in case the order goes wrong.
For these reasons, the CFPB gave a stern warning to consumers about the risks of BNPL. But, is that stopping merchants from utilizing it for their businesses?
Why Would Merchants Use BNPL?
Setbacks
Buy now, pay later poses risks to consumers: a higher likelihood of debt, hidden fees, and room to overspend. However, are there any issues for merchants who use BNPL as a payment option?
Using BNPL costs merchants around 2-8% in processing fees per transaction. Additionally, some providers tag on flat fees as well.
Compared to the 1-3% credit card interchange fees, is it worth offering BNPL with nearly 10% taken out of your hard work?
Some retailers are still on the fence. Yet, its widespread usage was apparent enough for Amazon to partner with Affirm. Some may see that the benefits outweigh the costs
Benefits
Want to appeal to the younger generation? Merchants using BNPL have raked in sales from young adults who state they wouldn’t have purchased without a BNPL option. Every company wants to appeal to a wider audience and that’s exactly what BNPL does for merchants.
Furthermore, businesses have seen higher value transactions take place. Clients jump to the decision when they see they only have to pay a quarter of the price up front.
The overwhelming majority of BNPL consumers are under the age of 44. Not surprisingly, this same cluster of generations are looking to move away from paying credit card interest as they’re still buried under big debts like student loans.
So does BNPL harm or hurt merchants? Does it depend on industry, audience, and appeal? Now, even hearing aid providers and AirBnB are on the trend. Many are also speculating that BNPL will ease its way into the healthcare industry and rent payments.
Ultimately, BNPL Relies On Merchants
If you’re a merchant, especially an eCommerce one, then the growth of BNPL lays in your hands. However, its continuous popularity can leave unparticipating businesses in the dust. Henry Ford refused to offer the kind of financing that GM had. Even Ford distributors curated payment plans while the main branch fizzled out.
At the same time, BNPL’s downfall is still a possibility. Regulators may tighten their grips and cause BNPL providers to charge more or come up with other stipulations for merchants and clients. Businesses can then opt out of offering BNPL, which would dry out the industry as other merchants follow suit.
After all, BNPL providers’ revenues are made up of the fees they charge merchants for using them. Some do have a small percentage of late fees as part of their income, but not nearly enough to sustain them.
Revitpay Offers Buy Now, Pay Later Options
We stay on top of the latest financial technology and therefore offer merchants the ability to use BNPL as an additional payment option. If you have any questions or are looking to add BNPL, contact us today.