How to buy now, pay later the old fashioned “BPL” has become fashionable

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Millennials and Generation Z have an addictive new way of buying things that would look familiar to their great-grandparents. “Buy now, pay later” is a type of consumer credit that really started in the 19th century when Singer sewing machines were sold for “one dollar less, one dollar a week.” But the modern fintech twist of “BNPL” is that it caters to people who make impulse purchases of fashion, jewelry or electronics rather than sofas or fridges. It is delivered through apps that have become popular, driving high valuations from startups such as Klarna, Affirm and Afterpay. Regulators from the UK to Singapore fear young borrowers are getting in over their heads, and there’s new competition from Apple Inc.

1. How was it born?

The “installment plan” is the forerunner of today’s BNPL craze. Reimbursement for weekly or monthly purchases evolved from 1840, as manufacturers of furniture, pianos, and farm implements sought to make products more accessible. Cars then brought installment credit further into the mainstream, although credit cards eventually became the preferred means of spreading out payments on small purchases.

2. Why not use credit cards?

They tend to be hated by young people attracted to the BNPL; The UK’s Financial Conduct Authority cites data showing that 25% of users are between 18 and 24, and half are between 25 and 36. As a group, young shoppers are wary of vendors who profit when customers don’t pay their balances. They prefer the sense of control provided by BNPL’s fast payment schedules, often spread over four to six weeks. For this reason, and because purchases are usually cheap, they are usually interest-free.

Most BNPL is not about buying big ticket items; it’s about using an app to buy that must-have jacket in hopes that you’ll pay it back quickly. The average spend for a transaction in the UK using the Klarna Bank AB app is 75 pounds ($94).

4. What makes it popular?

Applications are simple and usually involve only minimal credit checks. Retailers – who pay the BNPL provider a small percentage of the transaction value, as they do with credit cards – often tell shoppers there is ‘no need to wait for payday’ .

5. What about late payments?

San Francisco-based Affirm Holdings Inc. does not charge late fees, nor does Klarna Bank AB on its “Pay in 30 days” product, although many of their peers do. BNPL customers who do not pay their bills are blocked from further purchases and may be passed on to collection agents.

While Stockholm-based Klarna is still the BNPL beast, with 147 million active consumers, it is also losing money and coming under increasing scrutiny from regulators. It was valued at $46 billion in June 2021 but is expected to see its value drop to around $30 billion amid plans to tap investors for more cash, according to people familiar with the matter. There have been expectations for an initial public offering, possibly within the next two years. Klarna’s biggest rivals, Affirm and Afterpay, also have millions of customers, and competition is heating up as banks, credit card companies, fintechs and shopping sites combine to pursue the company. American technology entrepreneur Jack Dorsey’s Block Inc., a mobile payments company, completed the acquisition of Afterpay for $29 billion in January 2022. PayPal Holdings Inc. has agreed to buy Japanese provider BNPL Paidy Inc. for $2.7 billion in 2021.

7. Where does Apple come from?

In a June 2022 presentation, Apple previewed its long-in-development “buy now, pay later” feature, which splits the cost of Apple Pay purchases into four payments over six weeks. The feature, called Apple Pay Later, does not include any interest or fees. Apple will handle the loan itself, bypassing partners as it moves deeper into the financial services sector. Affirm CEO Max Levchin responded that he was not worried about new competition, saying his company offered bigger, longer-term plans and there was plenty of room for growth. for everyone.

The payment method accounted for 2.9% of the value of e-commerce transactions globally in 2021, or about $157 billion, according to WorldPay’s 2022 Global Payments Report. This figure is expected to reach 5.3% in 2025, whether Klarna or others lose market share. Europe leads, with BNPL accounting for 8.1% of e-commerce spending in 2021. But it’s also growing rapidly in the US: it accounted for 3.8% of online purchases by value in North America in 2021; this is expected to reach 8.5% by 2025. Its share of North American point-of-sale transactions is expected to reach 2% by 2025, according to WorldPay estimates, or more than $250 billion. In the Asia-Pacific region, BNPL is expected to account for 1.8% of e-commerce by mid-decade, or $78 billion.

That could be an irresponsible form of lending. Some regulators worry the painless borrowing is a “gamification” of purchases similar to Robinhood Markets Inc.’s stock trading app, creating the feeling that the spending isn’t real. Consumers struggling with accelerating inflation and rising interest rates could run into debt using different apps and then overdraw their bank accounts or incur credit card debt to secure the service of their BNPL accounts. The possibility of BNPL dragging people into a chain of borrowing elsewhere could create a hidden risk for the banking system. The Australian Securities and Investments Commission found that, over a year, 15% of BNPL users had to take another loan to make their payments, and 1 in 5 reduced their purchases of essential goods. Britain’s FCA says the sector needs to be regulated, Australia has a code of practice designed to stop customers borrowing more if they have difficulty repaying, and California has imposed a fine on unlicensed lenders.

• Bloomberg Businessweek’s preview of the BNPL payout plan having another moment.

• Millennials and Generation Z are addicted to Klarna, says Bloomberg News.

• Stephen Mihm of Bloomberg Opinion on a 200-year-old innovation.

More stories like this are available at bloomberg.com

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