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Buy Now, Pay Later: Risks and Rewards

The marshmallow test is a famous bit of social science research: Give a kid a marshmallow, tell them they will get a second one if they go 15 minutes without eating it, and then leave the room. If the kid is patient enough to wait for the second one, it’s considered a sign of future success.

Except that (spoiler alert) it turns out that’s not really true. Delayed gratification predicts nothing. It’s just…delayed gratification. Which is great news for consumers who are unabashed fans of buy now, pay later, also called BNPL.

Buy now, pay later is short-term financing that allows people to buy everyday items like home goods, electronics and clothes in low to no interest monthly installments — and receive the goods immediately. Also known as a point-of-sale loan, BNPL splits a purchase into multiple equal payments, with the first payment usually due at checkout and subsequent payments billed to a credit or debit card.

Buy now, pay later is appealing to consumers for its flexibility, affordability and accessibility. And there are a lot of consumers that use it: 56% of Americans have used a BNPL service, up almost 50% in just one year. The global market for BNPL services was $125 billion in 2021 and is expected to reach $3.2 trillion by 2030.

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The service is so popular, even Apple and Stripe — both of which have many millions of customers apiece — are getting into the game. PayPal recently expanded its BNPL Pay in 4 installment program to include PayPal Pay Monthly, which offers monthly payments over a 6- to 24-month period with APRs ranging from 0% to 29.99%. Many other fintech companies are doing the same and creating new or redesigned programs.

Buy now, pay later payment plans are particularly attractive to younger shoppers who want to avoid high interest rates on credit cards but need to spread the cost over a few months, especially for bigger purchases. That being said, BNPL options are not without risk or concern:

●      Higher APRs like 29.99% can make loans difficult to pay on time.

●      Consumers are using their credit card to pay off their BNPL loans, which not only defeats the purpose, but can hit their pockets twice, depending on credit card interest rates and BNPL loan interest.

●      Some BNPL services do in fact report to credit bureaus and/or have significant late fees, which can continue the cycle of debt and financial instability. 

●      Positive payment activity is not reported to the credit bureaus, which means payment activity will not help build credit.

●      BNPL services currently do not offer credit card or personal loan rewards like points, miles or cash back.

Each BNPL service is different — from the number of payments to the specific terms. The key similarity is the promise of a handful of payments spread over a short period of time, with no hidden fees and often, no (or very low) interest rates.

As convenient as it is to consumers, buy now, pay later is really a plus for retailers:

• It boosts conversion rates

• It drives order value

• It’s widely available

• It expands potential customer base

• It can lead to customer loyalty

BNPL financing is relatively easy for retailers to manage. Services increase retail conversion rates 20% to 30% and lift the average cost of the items consumers buy by 30% to 50%.

Digital electronics purchases are currently the most common use of buy now, pay later, with 48% of BNPL users having used it for that reason — and one-third of shoppers use BNPL monthly. As BNPL providers gain an even better understanding about consumers’ shopping and buying behaviors, they will likely become stronger partners to retailers than banks and payment networks.

Finally, customers that know BNPL is available at a retailer are more likely to come back. And that’s even more true when transparency and education around interest rates, late fees and loan terms are offered. In an inflationary environment where consumers are already very price sensitive and facing debt, that can be a true game changer for retailers that could pay dividends for years to come.


Anna Otieno is Head of Research, Strategy and Insights at New Engen, a growth-obsessed, digital marketing agency helping brands find breakthroughs to unlock and accelerate growth.

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