If you shop online you are almost certain to have noticed some sort of Buy Now, Pay Later (BNPL) option offered at checkout. But what exactly is it?

Since the COVID pandemic in 2020, Buy Now, Pay Later (BNPL) platforms such as Afterpay, Klarna, Affirm and Zip have seen a meteoric surge in growth, becoming available all over the world. These services allow consumers to defer the cost of their items,  splitting the payment into smaller installments over a set period of time.

With the rise of BNPL, customers now have the option to finance everyday items they would typically pay for in a single sum, such as clothing and groceries, and they can do so in one click. 

Taking out loans and splitting up payments into installments is not a new concept— however, it changes the way we do things. Traditionally, installment payments were used for larger-scale purchases and required customers to undergo some sort of application process.

While this point-of-sale (POS) option might improve the accessibility and affordability of certain items, the widespread adoption of this payment method comes with a range of risks.

Drawbacks

One of the major drawbacks of BNPL is that it may increase your inclination toward splurging on non-essential purchases. This is by design. 

Each time you make a purchase at a storefront with a third-party BNPL service, they are paid a commission by the merchant. These merchant fees are a major component of how BNPL businesses get paid, and therefore, BNPL companies have a vested interest in getting you to spend more.

This means BNPL has become a tool that corporations can use to majorly increase their profits. 

According to Square, a software company which specializes in POS systems and payment, popular BNPL company Afterpay increases customer spending by 40% and customer shopping time by 50% compared with customers using other methods. 

This increase in spending comes largely due to the psychological influence of splitting up payments into smaller sums, which makes otherwise unaffordable purchases appear more digestible. To most of us, it is much easier to justify spending $30 over four weeks on an item than it is to justify spending $120 at once. 

Not only is it easier to psychologically justify this spending, but these companies will also approve you for hundreds or even thousands of dollars in credit within seconds, including people with poor credit history or sometimes no credit history at all. 

Access to a platform that psychologically makes spending large sums easier and provides lines of credit to just about anyone comes with a high degree of risk, especially to younger, less financially literate people, as it implicitly encourages them to overspend.

These companies also explicitly implore you to buy more. Major players in this space such as Klarna, Afterpay and Affirm have dedicated mobile apps which serve as a portal to a variety of storefronts and even send push notifications encouraging you to check out products and sales. 

These payment plans can also make budgeting more difficult, especially if you frequently use these services.

If you have committed to multiple installment plans for different purchases, a plan that you began four months ago might not be at the top of your mind. You might look at your bank balance and think you have more money than you do, not realizing that a large sum of that money is tied up in pre-made purchases.

Committing yourself to weeks or even months of payment for items that you bought on impulse keeps money that you might need from your future budget, especially if an emergency arises. It also creates the possibility of late charges, additional interest and damage to your credit score, which could have been avoided by paying upfront.

In Canada, these services are considered a form of credit and are subject to provincial and federal laws that regulate traditional institutions offering lines of credit— in many other countries, this isn’t the case, and these providers are largely unregulated.

Regardless, it is important to remember that if you experience an issue with your sale— such as needing a refund— it might become more of a struggle to resolve the issue when a third party took your payment, as opposed to just paying through the merchant.  

Benefits 

Despite all the drawbacks of BNPL, these services still provide users with important benefits. 

Its widespread adoption in the last five years was fuelled by two main factors— corporations looking to more effectively rake in profits in their online storefronts as consumers increasingly abandon brick-and-mortar storefronts and consumers looking to stay afloat in times of hardship.

It is no surprise that these platforms gained so much popularity during the COVID pandemic, which not only halted in-person shopping but also left financial turmoil in its wake for many people.

As costs of living continue to increase, these services provide many people with the opportunity to purchase items they otherwise couldn’t. These services can be a necessity for many people to make ends meet.

Here to Stay

BNPL can be a useful tool to help fit emergency or one-time purchases (such as birthday gifts) into a budget while they wait for their next paycheque, but people are increasingly using these services for day-to-day essentials. According to data from PYMNTS Intelligence, 15 million consumers used BNPL loans to pay for groceries and manage their weekly food expenses in 2023.

The availability of BNPL has grown immensely in a few years and it is projected to keep exploding in years to come. 

When used correctly, BNPL can be a useful resource for budgeting and even critical for making ends meet for some people. It is crucial if you are using these services to be aware of the danger it poses because, for all of its uses as a budgeting tool, it can also serve to tempt you into racking up needless debt on impulse items.