In part due to the COVID-19 pandemic, a number of alternative payment methods have been on the rise in recent years – see Payments Cards & Mobile’s Why are “Alt Pays” on the rise?
Contactless payments like Apple Pay grew in use as customers grew more cautious about touching payment terminals.
As many turned to e-commerce, online payment methods like PayPal gained new customers. Curiously, however, one of the hottest alternative payment methods is also in a way one of the oldest: buy now, pay later (BNPL).
At its core, BNPL isn’t much different from the old-fashioned instalment plans that date back centuries.
However, there’s one big twist that’s made these particular instalment plans really take off: third-party providers – this is according to a new study by Chargeback Gurus.
When using a BNPL provider, the merchant gets paid immediately. Then it’s the provider’s responsibility to collect instalment payments from the customer.
For the merchant, that means they can allow customers to pay over time without taking on any additional financial risk.
Competition among buy now, pay later (BNPL) providers is hotter than ever, with big players like Apple, Goldman Sachs, Visa, and Mastercard getting into the game.
BNPL’s growth has been driven in large part by Millennials and Gen Z. It’s not just negative attitudes toward banks and credit cards fuelling this—these digitally-savvy consumers are used to subscription services, monthly charges, and the idea of paying for things in bite-size chunks over a period of time.
It’s clear that BNPL is here to stay, but without effective strategies for providers and merchants to mitigate fraud and disputes in the BNPL space, the road ahead could be full of pitfalls.
The current digital BNPL industry is still developing. Basic issues like returns and cancellations can sometimes cause difficulties, and fraudsters are still figuring out how best to exploit BNPL for their purposes.
Failing to navigate these obstacles correctly could be costly, both for BNPL providers and for the merchants they serve.
There are a number of important factors that have led to the rapid growth of the BNPL industry. One is that Millennials are less financially stable than previous generations and therefore less likely to be able to make large purchases without some form of credit or loan.
At the same time, Millennials are more concerned about debt and are somewhat hesitant to use credit cards for major purchases.
To meet the needs of consumers like these – as well as consumers in regions without much penetration by credit card issuers – companies like Affirm, Afterpay, and Klarna started popping up to offer third-party instalment payment services.
Klarna is currently leading the way in the BNPL space, in part due to its marketing tactics. Klarna has positioned itself as a shopping service rather than a credit provider.
As traditional banks have struggled with innovation, Klarna has disrupted the retail banking and credit card industries by providing attractive opportunities for both merchants and customers.
The BNPL market is growing at a prodigious rate, with some forecasters expecting the total annual volume to reach $1 trillion by 2025. This growth has led to legislators and regulators in a number of countries discussing possible action.
The scope of government regulation thus far has been limited. The most common change has been to classify BNPL providers under existing regulatory frameworks for lenders or consumer credit companies.
Australia ruled that—like credit card networks—BNPL providers can’t prohibit merchants from passing on fees to customers in the form of a surcharge.
In the UK, the Financial Conduct Authority asked for changes to BNPL contracts intended to make them easier to understand and to prevent late fees from being charged in certain situations.
While more regulations may follow, they’re unlikely to be so stringent that they significantly damage the BNPL industry.