Article by Gabriele Tramarin
Buy Now Pay Later, commonly shortened to the acronym BNPL, is an installment payment method which has recently revolutionized online market purchases and is not about to stop. After a huge increase of transactions served with this kind of payment in 2022, about 140%, it became one of the favorite payment methods for Gen Z – those born between 1996 and 2010 – and its popularity is constantly increasing among over 45, too.
Its low entry barriers and the promise of zero interest rate make it a no-brainer for consumers, even for minimum amount transactions. Another crucial advantage for consumers is that the providers of this services – such as Klarna, Afterpay and Affirm – are private credit institutes. They do not act under the same rules and policies of traditional banks, indeed they can avoid controlling customers solvency risk, which in consequence will not affect their creditworthiness in any way. Unfortunately, customers view this as risk-free, forgetting that it is still a debt that needs to be paid.
A study conducted by CFPB has shown that BNPL is commonly used among low-income population, which has generally the higher solvency risk. It is here that credit companies strike a good deal. The apply a late payment fee, which varies from 3% to 8%, reserving also the right for the reimbursement of any additional transaction fees.
Despite BNPL can be used exclusively for amounts up to 2000 euros, it is a risky move for unexperienced customers, especially younger ones. The build-up of unpaid debts makes wealth management much harder for people and incentivizes credit companies to take legal actions to have their money back.
To avoid this worst-case scenario, it is essential to promote initiatives that aim at teaching young people how to safely manage their wealth, weighing all risks, even the ones that do not seem to fall under this definition.
If adequately regulated, BNPL can be a good opportunity to have highly flexible payments; otherwise, it can only result to be a dangerous tool for the majority of the population.