US Payment company Square recently acquired AfterPay, an Australian Buy Now Pay Later fintech firm, at an astonishing valuation of USD 29 billion. That is massive. By the way, Buy Now Pay Later (BNPL) facility is getting popular in India too and e-tailers such as Amazon and Flipkart offer Buy Now Pay Later (BNPL) schemes to their customers. I have written about the Amazon Pay Later scheme earlier.
In this post, let us revisit the Buy Now, Pay Later model. How do the lenders make money? How do BNPL schemes fare compared to credit cards?
How Does the BNPL Model Work?
The e-commerce player partners with a bank/Non-Banking Financial Services company. For instance, for Amazon Pay Later, the finance partner is Capital Float. The credit partner may change but the concept remains the same. When you make a purchase, you select Pay Later as the payment option and complete the purchase. You repay the amount over the next few weeks and months. Well, that is also what the nomenclature suggests. You buy now and pay later.
If you are a first-time buyer, you will have to complete KYC. The lender will approve or reject your application instantly. If the application is approved, you will be given a credit limit. You can make purchases within the credit limit. You must pay back to the lender as per the EMI schedule. In some cases, you may not have to pay interest if you pay back the entire amount within a few days or weeks.
You may ask, how will the lender make money if you do not pay any interest? Well, it is just like No-cost EMI. The lender will pay a little less than the purchase amount to the merchant.
Let us say you make a purchase of Rs 10,000 on Flipkart. You select Pay Later as the payment option. The lender pays only say 9,800 to Flipkart and retains Rs 200 (as the upfront discount) which compensates the lender. After a month, you pay back Rs 10,000 to the lender. So, the lender shells out Rs 9,800 and gets back 10,000. If you go with an EMI, the lender earns the interest.
Where Credit Card Wins Over Buy Now, Pay Later?
Credit cards have an interest-free credit period built in. If you do not want to pay at one go, the e-commerce website may have a No-cost EMI offer for your credit card. Or else you can easily buy the product on EMIs that can range from 3 to 24 months. You can choose tenure as per your convenience.
The interest rate on credit EMI (if availed through Amazon or Flipkart) is likely to be lower than the interest for Buy Now, Pay Later schemes. Moreover, the tenure of a BNPL scheme is less likely to be up to 24 months. Therefore, if you own a credit card, it is difficult to think of a scenario where using the BNPL scheme will be a better choice. Credit cards also have wider acceptability. BNPL schemes may be used at only specific sites.
Note that ecommerce sites may offer cashbacks or No-cost EMI schemes on BNPL too. This is to promote the credit facility. In such a case, compare the all-in cost for credit card and BNPL EMIs and choose the better offer. However, for BNPL, you will have to do KYC etc, which is extra work.
Where Buy Now, Pay Later Scores Over Credit Cards?
It is not easy to get your first credit card. You have limited credit history or a poor credit score. You are not salaried. Low-to-medium income. And there are just a few reasons for rejection of your credit card application.
If you do not own a credit card, BNPL is a way to access credit. The approvals are almost instant. You might get a smaller limit to begin with. However, as the lender gets more comfortable with your repayment record, your limit might be increased, and you may be able to make big ticket purchases using BNPL.
Moreover, credit cards have convoluted charge/penalty structures if you do not pay on time. This causes a lot of confusion. For instance, if you don’t make the complete payment, the interest -free credit period gets withdrawn, and you are charged interest from the date of purchase. Penalties and GST compound the problems.
BNPL schemes (or any loans) are usually more transparent. You pay the EMIs and that’s it. Of course, there can be a penalty or penal interest. However, there is no concept of reversal of interest free credit period. Please note transparent does not necessarily mean cheap.
Which Option Should You Choose?
If you own a credit card and you plan to spend well, there is little merit in the BNPL facility for online purchases. Most ecommerce sites allow purchase on credit card EMIs. Credit card EMIs will be cheaper than BNPL EMIs.
In case, you do not have a credit card and still want to purchase on credit, BNPL is an option.
Remember both credit card and BNPL are credit products. Credit makes purchases easy. However, credit comes with interest cost, especially if you do not repay soon. Do not overspend. Do not spend what you cannot repay.