Inside Buy Now/Pay Later – what is it, and is it safe?

By now you’ve probably heard of companies such as AfterPay and Laybuy, both offering a product known as ‘Buy Now/Pay Later’ (BNPL). A number of customers seem to enjoy it as a debt alternative, enabling the purchase of big ticket items without, seemingly, the big ticket cost.

But what is Buy Now/Pay Later, is it safe for customers to use, and should you offer it as a business?

Buy Now/Pay Later in New Zealand

In the past two or three years, New Zealand has seen large growth in the use of BNPL services. Indeed, a Yabble/Payments NZ survey showed that, in 2020, 23% of Kiwis had utilised such a service to purchase goods, both in-store and online.

Similarly, NZ Post’s ‘The Full Download’ report showed that BNPL grew 105% in 2019 and then another 57% in 2020.

BNPL is most popular among younger people, noted by both Yabble and NZ Post as the biggest users of the service, although it has seen some growth in the over-60s too.

Concerns in the BNPL market

With strong growth has also come some concern.

These services are not currently regulated by the New Zealand government, although the Ministry of Business, Innovation and Employment is monitoring the industry’s code of practice and has some powers under the Credit Contracts and Consumer Finance Act to potentially crack down in future.

There are also some concerns around debt – which we’ll get into later in this article.

How does Buy Now/Pay Later work?

BNPL services allow customers to make purchases in-store or online now, without having to pay the full price up front. It literally is ‘buy now’ then ‘pay later’.

When utilised, the service provider pays merchants the full price of the product then consumers pay the service provider back in set installments. For example, four equal fortnightly repayments.

One of the drawcards of BNPL is that the providers do not charge interest. So long as customers pay the costs back in the required installments, they don’t pay any extra interest (or surcharges) – like they would a credit card or bank loan.

So how do Buy Now/Pay Later services make their money?

The short answer? Fees.

What customers pay

Customers may be required to pay establishment fees or late payment fees, depending on which provider they choose. Indeed, it’s common for BNPL services to charge a first-time late fee for a missed payment, then a steeper fee each late payment thereafter, with a maximum amount that is capped either at a set value or percentage of the total purchase (i.e. 25%).

What businesses pay

Here’s where BNPL services tend to make more of their money – transaction fees.

Merchants pay more per BNPL transaction than they would a typical credit or debit card purchase. Whereas traditional payment options might incur, say, a 1-1.5% transaction fee, BNPL commissions are in the range of around 5-6%, with some such as Afterpay also charging an additional 50c per transaction.

Concerns over BNPL and fees charged

Some organisations are openly concerned with the rapid growth of BNPL services, especially as a largely unregulated industry.

For instance, the Australian Securities and Investments Commission released a report stating it was worried BNPL created some risk for consumers if they take on debt they can’t pay back. They found some consumers were delaying paying bills, becoming overdrawn, or borrowing money to pay back their purchases.

Westpac Senior Manager in Digital Ventures Mike Burke warned that while BNPL seems like a better deal than credit cards, it is “materially the same product”.

“Terminology like credit, loans and debt are bank lexicon, and terms like this makes these customers’ nervous,” he said.

“‘Buy now, pay later’ is a debt or loan product that, through branding or language, gives the perception of empowerment to customers.”

Is Buy Now/Pay Later safe?

From a data security point of view, Buy Now/Pay Later schemes are, generally, considered safe.

While providers may not be as heavily regulated as other money lenders, they’re still required by law to protect the data that they acquire.

Their websites tend to feature key basic security features such as two-factor authentication, as well as industry-standard security compliance requirements and fraud detection measures.

So should my business offer Buy Now/Pay Later?

In today’s modern world of online shopping, where as many as 2.19 million Kiwis are shopping online (NZ Post Full Download 2021), merchants must offer a variety of payment options in their e-commerce stores.

Kiwis have shown that they like choice. Credit and debit cards are popular, but other services – such as BNPL, digital wallets like Google Pay, and direct online payment platforms such as POLi – are all rising in popularity and are used by millions of Kiwis each year.

The decision to offer BNPL is a personal one, but definitely worth considering. We here at POLi are a competing product to BNPL and even we are saying you should look into it. Weigh up the pros and cons and decide if the merchant fees are worth the convenience to your customers.

But remember: BNPL shouldn’t be your only offering. Even as it grows, so too do other options. A mature ecommerce platform in the modern age offers a variety, so customers can choose to pay however they like – whether they pay all at once, or split the cost into instalments. It’ll be their decision.