GLOSSARY: Retail finance platform

What is ‘Buy Now Pay Later?’

The term ‘Buy now pay later’ (A.K.A BNPL ) is referring to the customer taking home their purchase but paying for it over time. 

In the past, ‘Pay later’ shopping typically referred to an interest-free period following the purchase, during which no payments were made and no interest charged. However, after this interest-free period, payment in full was expected otherwise the interest from the original time of purchase was added.

Finance technology has revived the concept of ‘Shop now pay later’, with modern versions much clearer about the payment and interest plan over the period of the loan. 

There are two types of BNPL solutions:

  1. Merchant transaction fee loan  – One type of point of sale loan does not charge the consumer any interest, instead charging the merchant a transaction fee. This interest-free solution is offered by companies such as Klarna, Splitit or AfterPay.
  2. Shopper Interest loan – The other type of BNPL is a point of sale loan, where the consumer is offered an on-the-spot loan by a third party. The customer is able to receive the item right at that moment, but pay overtime, including interest. There is no charge for the merchant.

 

What are the pros and cons of ‘Buy Now Pay Later’ for shoppers?

The advantages of Buy Now Pay Later (BNPL) for Shoppers:

  • Ability to take items home right away and pay later.
  • Potential to pay no interest if payments met on time or the entire amount is paid off by the time the loan period ends.
  • A great option for unexpected or emergency purchases.

The advantages of Buy Now Pay Later (BNPL) for Merchants

  • Lowering and removing shoppers buying hesitations 
  • Increasing average order value (AOV) and enticing shoppers to make bigger ticket purchases. 
  • Increasing overall sales 
  • Opening a new stream of income via loan interest
  • Providing a holistic and pleasant branded customer purchase experience
  • Financing shoppers with no need for another piece of plastic as is the case with a branded credit card.

 

Disadvantages of BNPL for Shoppers

  • Interest is charged in total and on the original amount at the end of the interest-free period if there is one.
  • The loan is a one-off and is not revolving credit that can be used again and again.
  • Can create a hard check on your credit suitability which can potentially damage your credit rating.

 

Will a “Buy now pay later’ option affect my shopper’s credit score?

Whether ‘Buy now pay later’ (BNPL) will affect your shopper’s credit score depends on the terms and conditions of the service that you offer them. Their credit score can be affected if the financing solution pulls their credit information in order to make a decision on whether to approve the loan application.

Certain pay-over-time solutions that aim to be popular with millennials might not base their decision to approve credit on credit rating, but a build-up of points within their own structure. Affirm is an example of a company that uses its own credit system. These financing solutions allows borrowers an increasing amount following continued reliable usage.

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