Buy now and pay later is the latest trend among youngsters who are especially drawn to the latest fashion trends or online markets or online shopping deals. The Buy Now Pay Later or the BNPL is a concept of short-term financing which allows the customers to purchase things and make payments within a prescribed period in the future, without having to pay any extra amount as interest in the future. The concept of Buy Now Pay Later (BNPL) also goes by the name “Point of Sale investment Loans”, and is increasingly becoming relevant and a popular choice for people seeking instant gratification.
The Point of Sale investment Loan allows the buyer to make payment for the products or services purchased/procured by making the payment through a lender and then seeks repayment from the buyer within the stipulated time either as a lump-sum amount or in equal monthly installments. It is only available to the customer or buyer who signs up with a company (generally e-commerce websites) providing for the BNPL facility and agrees to the payment terms and conditions. However, failure to make payment within the stipulated time will not only make the liable to pay the principal amount with interests but will also affect the credit score of the individual. In India, only a few online merchants and fin-tech companies offer BNPL services to the customers and yet pose a convenient alternative over credit cards. Some of the names include PayPal, Zest money, Paytm post-paid, Amazon pay later, etc.
How does the BNPL system function?
All fin-tech companies and online merchants work on the same terms and conditions, more or less dependent on each organization. They usually operate along with the following rules-
- The online merchant or any fin-tech company enters into a partnership with one or more retailers for the facilitation of BNPL payments.
- Any customer makes a purchase and selects BNPL during checkout by making a small portion of the payment (around 10-25%) of the overall charges.
- The remaining amount could be selected by the customer to be either paid as a lump-sum amount or converted into easy interest-free EMIs;
- Payments could be made by the customer through any mode such as debit card/credit card, online banking, or through mobile wallets.
Advantages of BNPL System of payments
Provided below are some of the benefits of availing BNPL system-
No higher credit score requirement
Unlike other personal loans or credit cards, where there are higher credit score requirements for being eligible to avail loans, BNPL is an exception to the same as there are no harsh eligibility criteria related to credit check requirements or where it is done it is lesser harsh as in case of a credit card, making it possible for customers to avail the service.
Interest-free Lending for the prescribed period
The BNPL system is the best suited to customers who wish to make purchases for the interest–free period and can make remaining payments either before or on the expiry date of the repayment.
Convenient and faster Approval
The BNPL system offers comfort and convenience to the customers with the advantage of instant gratification. Any customer wishing to do shopping doesn’t even need to install any separate app or fill in any additional information under the BNPL option is available with the websites of online merchants once the payment is complete by clicking the option.
Disadvantages of BNPL System
However, there are certain disadvantages of availing BNPL services-
Payments on time don’t improve credit scores-
Despite timely repayment of the amounts on time, no benefit of credit score improvement under the BNPL system is allowed that is not in the case of credit card repayments. Further, unlike in the case of payments made through credit cards, no reward points or cash-back offers are provided to the customers.
Complications in getting payment refunds in case of product returns
Though, the process of using the BNPL system during the check-out during online shopping would be faster and more convenient for a customer. But, if the product needs to be returned, the process of refund becomes complicated and sometimes the refund may take longer than usual, even requiring the customer to pay EMIs regardless of product returns.
Restricted to smaller payments only
Currently, the BNPL system allows only a limited amount of sum for a credit available to customers that is irrelevant in cases where the customer needs more for making purchases. Therefore, customers having a decent income would prefer to use a credit card if they need to spend a large sum for purchasing any goods or availing of any services purchase that seems impossible under the BNPL system currently.
Risk of Higher Rate of Interest
Although the BNPL services do offer interest-free short-term credit facility, however for the customer who avails the facility while shopping fails to make payments on time, the rate of interest beyond the interest-free repayment period is quite higher, which may be sometimes either equal to or even higher than those charged by credit cards.
Thus, apart from certain limitations, the BNPL system offers an opportunity for the buyers to purchase goods or avail services within the interest-free period and make payment later depending upon their income and purchasing power when used cautiously on one hand and facilitation of business objectives of the online merchants and fin-tech businesses on the other. For a country like India, which has one of the largest producer and consumer markets, the BNPL system has a huge business potential especially relevant in times of the COVID-19 pandemic where online shopping has caught attention due to comfort and safety reasons.