The Boom and Slowdown of Buy Now, Pay Later Companies

Buy now, pay later companies, often abbreviated to BNPL, have become increasingly popular in recent years. Affirm, Klarna, and Afterpay (a subsidiary of Block) are among the leading players in this industry. The business model of BNPL has experienced exponential growth during the pandemic-fueled e-commerce boom. When shopping at your favorite online merchants, you may have noticed offers to split your purchase into interest-free monthly installments.

However, the growth of BNPL has started to slow down as the pandemic-era growth has stalled, and economic concerns are making consumers more reluctant to spend money on non-essential purchases. In response to this shift, major BNPL operators are now launching co-branded payment cards that can be used anywhere, expanding their services beyond retailers that offer BNPL financing.

How Do Buy Now, Pay Later Services Work?

Buy now, pay later services can be seen as a combination between a credit card and an installment loan. They allow customers to divide a purchase into a series of monthly payments, similar to a short-term installment loan. Unlike traditional installment loans, the application process for BNPL services is quick and easy, offering instant approval decisions. The money is paid directly to the merchant to complete the purchase, similar to a credit card transaction.

Some BNPL services offer merchant-subsidized interest-free financing, such as Affirm’s collaboration with Peloton. Other services charge interest based on the customer’s creditworthiness, while some only charge interest to borrowers with less-than-ideal credit histories.

Introducing BNPL Credit Cards

Major BNPL companies are now issuing physical payment cards, allowing customers to enjoy the flexibility of BNPL financing wherever major credit cards are accepted. Klarna was the first major BNPL player to introduce a co-branded Visa card, followed by Affirm and Afterpay. For example, the Affirm Card offers customers financing options with the ability to spread payments over time. In the past, one limitation of BNPL services was the dependency on participating merchants. The introduction of these payment cards eliminates that limitation, giving users freedom to use BNPL services at any location that accepts credit cards.

The Pros and Cons of BNPL Payment Cards

Like any financial instrument, there are pros and cons to using BNPL payment cards. One advantage is that the requirement to make equal monthly payments can encourage responsible spending. Unlike credit cards with low minimum payments that can lead to prolonged debt and large interest payments, BNPL payment cards help users pay off their balances in a set timeframe. However, it is essential to ensure that sufficient funds are available in your bank account to avoid overdraft fees when payments are due.

On the downside, the accessibility and convenience of BNPL payment cards may encourage some users to spend more than they originally intended. It is crucial to exercise caution and budgeting skills to avoid financial trouble. Understanding the terms and interest rates associated with BNPL cards is important to make informed decisions.

The Future of BNPL Services and E-Commerce

While BNPL’s growth has slowed in recent times, it remains an integral part of the e-commerce landscape. As the market evolves, BNPL providers are likely to adapt their offerings to cater to changing consumer needs. The introduction of co-branded payment cards indicates a shift towards more widespread acceptance beyond specific retailers.

BNPL services have the potential to bridge the gap between credit cards and traditional installment loans, providing customers with flexible financing options. As the e-commerce industry continues to thrive, BNPL services are expected to play a significant role in driving consumer spending. However, consumers must exercise caution and use these services responsibly to avoid falling into unnecessary debt.