While many may believe that Buy Now, Pay Later initiatives are new, EVP, Head of Global eCommerce, Worldpay Merchant Solutions, FIS Shane Happach highlights that the option of paying in instalments has been available in regions like Latin America for a couple of decades.

It must not be assumed that mature consumer payments schemes do not exist in regions in which most people pay with cash, but concerns persist around whether these products add pressure to a country’s debt pile – or an individual’s – especially as regulators are not looking into these payment methods.

Worldpay’s new ‘Global Payments Report: The pathways of people and payments’ reveals that Buy Now, Pay Later schemes like Klarna, Afterpay and Affirm are growing at a rate of 39 percent annually in the U.K. and will double their market share by 2023.

The report also predicts that these services will earn nearly 3 percent of global ecommerce spend by 2023; it is clear that at point of sale (POS), more transactions will be digital, which is a reflection of the age in which we are living.

• What is the Outlook of Buy now, Pay later Scheme for the Future?
• How does Buy now Pay later Affect Credit Score?
• How does Buy now Pay later Work?
• How big is the Buy now Pay later Market?
• What are Some Benefits of Buy now, Pay later?
• How can you implement BNPL in your store
• Basic components of buy now, pay later platforms
• Is it better to pay in Installments?
• What is Driving the Growth of Buy now, Pay later?

What is the Outlook of Buy now, Pay later Scheme for the Future?

In conversation with Happach, he says with fintech companies and Big Tech firms entering the payments space, this has “amped up the targeting, the applicability and consumer experience so it now appeals to different verticals and different customer segments.

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What all Buy Now, Pay Later companies will say is that they are not seeking to drive credit adoption and it is not about predatory lending, they are merely providing an alternative.”

Despite providing more choice, another concern has emerged around the use of celebrity endorsements to promote Buy Now, Pay Later companies – Klarna being a good example here.

Further, asking celebrities to recommend beauty products, restaurants or excursions is very different to the endorsement of a financial product, and has since resulted in a negative response from the Securities and Exchange Commission.

However, Buy Now, Pay Later consumers, as Happach describes, are “budget conscious and credit averse”. The educated financial customer has emerged from the technological revolution and expect data to make mass-personalisation possible.

As the report states: “Off-the-shelf, pre-packaged solutions won’t satisfy their unique aspirations” and a mobile-first world is the only reality that this generation has known, which is why they expect greater performance from their brands.

Happach explains that before the age of digital financial products, there was next to nothing marketing for payment methods. Today, payments are at the forefront of consumer minds because people require “instant gratification, which has been driven by increased communication through increased connectivity.”

It is important to recognise that as time goes on, payment methods will replace or substitute other traditional form factors as the customer attempts to reduce friction themselves.

The Worldpay report also explores an example of this and reveals that how digital wallets are set to account for a third of U.K. online payments by 2023, but Britons are not likely to go cashless soon despite cash’s steep decline at a rate of 10 percent a year.

But what about the rest of the world? Happach points out that mobile penetration is more prevalent in certain geographies in comparison to others and with these countries having leapfrogged over the traditional PC, digital payments have taken off.

While cash will never be eradicated because it is ultimately a good option for those without access to digital services, what keeps digital wallets and cash competing is simple use cases such as the cost of account payments.

Happach concludes: “Convenience is the driving force behind the boom in digital and mobile wallets. Global consumers now expect convenient and connected, omnichannel experiences.

“Buy Now, Pay Later delivers a more intuitive level of convenience and access for consumers than traditional credit cards. As digitally savvy Gen Z consumers come of age, this is especially significant as younger consumers are more used to making snap purchases and then deciding later if they want to keep it.”

How does Buy now Pay later Affect Credit Score?

Buy now pay later schemes do exactly what they say – you get the opportunity to buy something without having to pay for it until a later date. Also known as point of sale credit, some schemes give you 30 days to pay while others allow you to up to 12 months.

Buy now pay later is a form of credit so how you use it can have an impact on your credit score. You are effectively borrowing the price of the item for the length of the delay period.

If you use buy now pay later sensibly and make your repayments on time it shouldn’t have a negative effect on your credit score. In fact, it could improve it. That’s because when you use credit sensibly it shows lenders that you are a reliable borrower.

If you miss a payment or fail to pay back what you owe when the time comes, it can be noted on your credit report. That mark could then stay on your credit record for six years, lowering your credit score.

This means that when you apply for a loan, credit card or mortgage in the future how you used buy now pay later could affect whether your application is approved.

Applying for lots of buy now pay later deals could also be bad news for your credit score. If the company does a hard search of your credit report when you apply for buy now pay later it will show on your credit report to other lenders. Lots of these searches worry lenders when they check your credit report as it looks like you are desperate for credit.

Some buy now pay later firms don’t do a hard search though. Instead they opt for a soft search, which won’t impact your credit score.

How does Buy now Pay later Work?

Buy now, pay later (BNPL) apps are the hot new way to, well, buy things now and pay for them later.

You’ll often find these apps — think PayPal Credit (formerly Bill Me Later), Affirm, Klarna, and Afterpay — at the checkout page of your favorite online retailer. They offer you a way to pay for your purchase over a series of monthly installments, often “interest-free.”

According to a recent BNPL study done by The Ascent, over one-third of U.S. consumers have used a BNPL service, a number that’s risen significantly over the past couple of years.

Unfortunately, the study also found that only about 1 in 5 of consumers who use these apps actually understand how they work. And this lack of understanding can lead to unexpected fees and damaged credit. Here’s everything you need to know about how buy now, pay later apps work.

Buy now, pay later apps allow you to make purchases online and pay them off over time in weekly, bi-weekly, or monthly installments.

These apps sometimes charge interest, much like a credit card, but they may offer “interest-free” periods. If you pay off your balance before the period ends, you can avoid paying interest altogether. The regular interest rates on BNPL are typically very high.

Popular BNPL apps include Bill Me Later/PayPal Credit, Afterpay, Affirm, Klarna, and FuturePay. You’ll find them at the checkout pages of many online retailers. A typical BNPL interest-free offer might break a purchase into four equal installments, the first one paid at checkout and the other three paid every two weeks.

For example, if you’re making a $200 purchase, you might see a BNPL payment option that lets you pay for the item in four interest-free installments of $50 each. You’ll pay $50 today and receive your item, then another $50 every two weeks for six more weeks.

If you don’t make your payments on time or fail to pay off your balance before the interest-free period ends, you could get hit with big late fees and interest charges.

How big is the Buy now Pay later Market?

A recent report from IBISWorld predicts the Buy Now Pay Later (BNPL) industry will continue to grow 9.8% annually over the next five years to $ 1.1 billion.

During the Covid-19 “BNPL service providers are likely to benefit from consumers using industry services for essential items,” IBISWorld senior industry analyst, Yin Yeoh said. IBISWorld notes that some Australians have used BNPL to buy essential items like clothing and groceries.

Afterpay’s current market capitalization is $ 17.7 billion after the share price jumped from $ 8.90 on March 23 to over $ 70 per share in July, pushing Afterpay out of the top twenty ASXs.

Yin Yeoh stated that as bank accounts run out, more consumers are likely to turn to BNPL options. The ability to shop now and pay becomes more and more attractive to consumers in financial distress.

IBISWorld predicts the BNPL industry will grow 9.1% in 2020-2021, bringing it to $ 741.5 million, as online shopping revenue grows 6.4% this year to $ 31.2 billion. BNPL platforms such as Afterpay, Klarna, and Zip Pay are expected to receive some of this growth, IBISWorld reports.

Australians are increasingly moving away from credit cards: data from the Reserve Bank of Australia show that the number of used credit cards has decreased by 6.6% in the last financial year.

In May Australians ditched more than 100,000 credit cards, bringing the number of valid cards back to levels not seen since 2009.

Given that interest-free services like AfterPay, and ZipPay are more popular among the younger generation, and free debit cards that regularly offer perks like $0 international transaction fees, the future of credit cards looks grim.

What are Some Benefits of Buy now, Pay later?

Now let’s find out what the benefits are for retailers of BNPL services.

• Up-front and in-full payments. With BNPL services, retailers get paid up front and in full. Payment providers shoulder the credit risks, so you don’t have to worry about chasing after late payments.
• Higher conversion rates. Shoppers tend to buy products if they can afford to take them home right away. Industry data shows that merchants can increase their conversion rates by 20% to 30% with a BNPL service.
• Higher average transaction value. When customers are provided with a buy now, pay later option, they’re more likely to buy more products and spend more money than usual.
• Larger customer base. A buy now, pay later service can attract customers who wouldn’t have visited your store otherwise. Today, there are millions of consumers who use BNPL services, and many of them are looking specifically for stores that offer it.
• Repeat purchases. Customers tend to make repeat purchases more often with BNPL. Afterpay BNPL shoppers make purchases more than 20 times per year on average.

How can you implement BNPL in your store

Here are a few tips on how to implement a buy now, pay later service in your store. But first, you need to find a BNPL service provider.
Here are some key factors you should consider when choosing a BNPL partner:

1. Point of sale integration. To ensure a smooth checkout process, use a provider that integrates with your existing POS system. This way you’ll be able to reduce the need for manual work and double entry.
2. Fees. It’s typical for buy now, pay later companies to charge a fee for processing payments. Usually, it’s in the form of a percentage of the purchase price plus a transaction fee. Research the fees of different providers to choose the most suitable solution.
3. User base. It’s better to choose a trusted payment provider that has a strong user base. A well-known provider will showcase you to more people and attract customers to your store.

Basic components of buy now, pay later platforms

Buy now, pay later services usually have the same core components:

• Loan terms. These depend on the provider and the retailer. For inexpensive purchases, loan terms can be a few weeks to six months. For big purchases, customers can pay for two or more years.
• Purchasing power. The purchasing power usually depends on the provider. BNPL providers offer loans of up to $30,000.
• Repayment frequency. Consumers pay back credit in weekly or monthly installments, while merchants are usually paid back in up front and in full.
• Convenience. Everything is done quickly and easily. Customers can apply for loans and get approved in minutes at the point of sale or online.
• Paperless. Everything from the application process to loan management is done online. With buy now, pay later, customers don’t have to physically print or sign anything.

Is it better to pay in Installments?

When businesses offer to split up the payments in a large purchase, it usually brings them more business.  If the pain of buying (the cost) is lower, or appears to be lower, more people will buy.

Businesses, of course, don’t offer this out of the kindness of their hearts.  They want extra money.  Paying through installments almost always costs more — either through payment fees, or through interest.

Most consumer loans are either (a) expensive, or (b) 0% for some period of time but get really expensive if you miss a payment.  The low payment, or the low payment and the promise of low interest, are there to get you to seal the deal.  And they must work, or businesses wouldn’t continue to offer installment plans.

The expense of most installment loans can’t be ignored, but, as always, there is the other side of the coin to consider.

Paying cash, on the whole, is often wiser than paying in installments.

But is it always wiser?  It’s certainly not unwise to pay when you owe people as soon as you’re able.  Of course not.  I would argue, though, that it’s not always beneficial to pay the whole amount of something up front.

There are a few main costs to paying cash (or cash equivalent) in full:

• More constrained cash flow.  Paying $10,000 cash for a car ends up costing less than borrowing the same amount at 6% for 48 months.  Nearly $1,300 less.  All well and good, but now you’re out $10,000, instead of out only $234.85, which is the first month’s payment.  If you had $65,000 in the bank before making this purchase, it’s a no-brainer.  Lots of cash left.  But if you had only $12,000?  Probably a bit risky, because your reserves are way down now.
• Opportunity cost.  Paying $10,000 cash for a car means that, although you own the car free and clear, you no longer own the $10,000.  Is that a problem?  It is if you had another use for a large chunk of that money.
• Lost earnings on that money.  In today’s environment that’s utterly punishing to savers — 0.25%?  Anyone? Anyone? — this admittedly is a minor consideration for most people.  At some point, though, the interest rate on the loan gets low enough that there may be an investment out there that beats it.  In that case, it doesn’t make a whole lot of sense not to take the loan!

Two times you should pay in installments

This isn’t going to be an earth-shattering list. But these are the times we recommend paying in installments instead of all at once:

• When there is no cost savings for paying in full.  Or, when there is no extra cost for paying in installments.  If you don’t get some kind of break for paying in full, why do it?  Our county’s real estate taxes and personal property taxes are billed twice a year for precisely half of the total tax each time.  Paying it all in full just means that we’re out the second half six months ahead of time, with no benefit to us.
• When the cost of the installments is acceptable in a reasonably thought-out context. But there could be any number of reasons why you’d pay in installments, even though it costs more.  Maybe things are going downhill fast for aging parents, and you’ll need more cushion for the next year.  Or maybe you can cash in on a teaser rate that makes the cost of the installments barely noticeable.  But whatever the reason, if you’ve looked at the numbers, and understand the costs, then who am I (or anyone else) to judge?

What is Driving the Growth of Buy now, Pay later?

Before the emergence of online shopping, there were shopping catalogues, published and distributed by retailers who offered everything from clothes to household appliances and sometimes even furniture.

Shoppers could browse through the pages and order, by mail, the items they wanted. Payments could be made via bank transfer or cheques and in most cases, paying in instalments (usually with some interest or added fee) was also an option.

As e-commerce began to take hold in Europe and the US, these catalogues were eventually replaced by websites, and cheques were shunned in favour of credit cards and digital payment services like PayPal.

Growth in e-commerce is closely aligned with innovation in financial technology (fintech), particularly in digital payments – buying goods online requires one to pay for them online too.

The latest innovation in the payments space is the digitisation of paying in instalments, better known now as “buy now pay later” (BNPL), which offers shoppers the option to purchase goods online and pay for them in instalments without the added fees that the catalogues imposed on their customers.

It’s a financial product that has attracted millions in investment around the world, leading to the success of startups like Afterpay, Affirm, Klarna and now even PayPal has launched its own BNPL offering in the US, PayPal in 4.

Regional Landscape

Hoping to replicate the success of these global players, some 10 new BNPL startups have emerged over the past year across the Middle East and North Africa (Mena), alongside last-mile powerhouse Aramex.

It’s a segment of fintech that has benefited from the pandemic, bolstered by the rise of e-commerce and the ongoing uncertainty over financial security among large swathes of the population.   

The best funded of these new startups in Mena is UAE-based tabby (part of Wamda’s portfolio of startups), which recently raised $23 million in debt and equity financing for its Series A round, pushing its total investment raised to date to $32 million. 

Tabby presents itself as an alternative to cash on delivery (COD), which in many Mena countries remains the mainstay of e-commerce transactions. While COD payments dropped during lockdown when fear of transmission of the coronavirus on surfaces was especially high, it has picked up once again.

The lack of financial inclusion and a lack of trust in paying online is often cited as the reason for COD’s popularity in Mena. As the only part of the value chain that customers can control, they want to receive and touch the product before they pay for it. BNPL allows them to do this, they receive the product and pay for it in small amounts as opposed to a big financial commitment in one online transaction.

“People are becoming comfortable paying by card, but a large portion of customers prefer to pay COD, they want the product first and then pay for it later. Merchants don’t like it, but they feel the need to offer it because that’s what customers want,” says Hosam Arab, founder and CEO of tabby. “With BNPL, you can receive your order first. When you receive it and are satisfied, that’s when you pay.”

BNPL is being touted not only as a solution for COD, but an alternative to credit cards too, something that appeals to the younger generations who are keen to avoid debt.

“I would say BNPL is the antithesis to credit cards,” says Anuscha Iqbal, co-founder and CEO of UAE-based Spotii. “Credit cards and traditional financial products have been modelled entirely on profiting and benefitting from people’s bad behaviour, they rely on high fees and APR [annual percentage rate], they want you to be late [in repayment] so they can charge you the financing cost.

BNPL flips that on its head, it’s designed to benefit off of people’s good behaviour.” Spotii recently attracted investment from publicly-listed Australian BNPL company, Zip. 

A study from Cardify in the US showed that 80 per cent of users of BNPL are between the ages of 19 and 34, more than 70 per cent are female and 60-65 per cent of users earn less than $50,000 a year.

The study also showed that many consumers try BNPL once they’re close to reaching their credit limit, although many could still cover the cost of the purchase upfront if they chose to.

“They don’t want to spend what they don’t have and they’re able to manage their cash in a way that makes sense for them, but they still want everything right now,” says Tariq Sheikh, founder and CEO of Postpay, which is currently raising for its pre-Series A round.

Regionally, the userbase covers all sections of society and income levels who are financing their BNPL transactions primarily through their debit cards according to the startups we spoke to.

“The user skews young, millennials and Generation Z are a large part of it, there is a natural aversion of that generation to credit. Younger millennials saw the excessive cost of debt in the 2008 [financial] crisis, psychologically, there are a lot of negative connotations to credit,” says Iqbal.

To determine the “trustworthiness” of customers and their eligibility, BNPL players assess their credit risk, they analyse their digital footprint from a host of public and private data, including their shopping habits and behaviour, spending power and purchases to determine if they can be trusted to buy now and pay later.

Merchants

When consumers pay back on time, it increases the frequency of purchases, for the merchants, BNPL helps drive sales according to Arab and increases loyalty and conversion rates by about 20-50 per cent depending on the vertical.

“Merchants have two tools to incentivise customers to buy, the first is discounting,” says Arab. “Generally, you’re not moving the needle much if the discount is below 20 per cent.

The next tool is marketing and it won’t work unless you’re investing relatively heavily. Instalments is another way to incentivise sales and that is much, much cheaper.”

BNPL not only help boost sales for merchants, it also improves transaction sizes too. Typical basket sizes for BNPL are Dh200 with the most popular verticals being fashion, beauty and home furnishings.

“The customer is more comfortable spending more money if they can pay it over a longer period of time, it improves loyalty,” says Arab.

Instalment periods can vary between two to three months, all the way up to a year. While merchants foot the bill for BNPL fees, it is not too dissimilar from the processing fees charged by credit cards and banks.

“In addition to the facilitation of payments, the way successful BNPL works is they form a much deeper partnership with merchants. It brings the entire ecosystem up,” says Iqbal. “Everyone is looking to offer online payments and to give consumers the flexibility they’re demanding and looking at ways to enhance customer acquisition and loyalty.”

Postpay requires customers to pay one instalment up front, which reduces return rates to less than 2 per cent according to Sheikh.

“When there is skin in the game for the customer, they are less likely to return the product,” he says.

Ethical Question

Following reports of young people racking up debt as a result of BNPL, questions are now being raised over the ethics of the payment option, with calls for regulations in several countries.

In the UK, social media influencers have come under fire for promoting BNPL options, particularly Sweden-based Klarna’s services for encouraging young people to spend more money than they have.

BNPL’s focus on fashion and beauty suggests they are focusing more on impulse purchases that threaten to push consumers into financial overcommitment, while presenting itself as a consumer-friendly cashflow management tool rather than an interest free loan.   

BNPL in Australia, where Afterpay is based, remains unregulated, but the Australian Securities and Investments Commission (ASIC) and a Senate committee forced the sector to introduce a code of conduct to prevent the prospect of tighter government regulation.

There are currently no regulations in Mena specific to BNPL, but in October this year, tabby and KSA-based Tamara became the first BNPL startups to operate in the Saudi Arabian Monetary Authority’s (SAMA) regulatory sandbox.

“The regulator has a task to balance the need for growth and innovation while protecting the consumers,” says Iqbal.  

The sector is still too small in the region to attract the ire of regulators or even banks for that matter.

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“A lot of the banks we’ve spoken to especially the ones that are digitally savvy, they want to figure out how to work with BNPL to bring in another value added service to give to merchants or figure out how to work with BNPL for better customer acquisition,” says Iqbal. “Interestingly they’ve taken a very collaborative approach, maybe they think it’s still small enough space that is not eating into credit card fees.”

Most of the regional BNPL players have also signed up with offline merchants and some have partnered with Visa and Mastercard with the intention to create their own digital payment cards. Over the next few months, we’re likely to see new offerings and services from these BNPL startups to entice customers to sign up.

“The market is big in the region, but it’s not big enough for six, seven or 10 players, in the coming months we will start to see some of the players who have been late to the market fizzle out,” says Shiekh. “The balance is trying to understand how to create value in the market for retailers and customers and making sure we’re sustainable.”