Buy now, pay later

Buy now, pay later, also known as BNPL, is a type of short-term financing arrangement growing in popularity. This growth has been, in part, fueled by the surge in e-commerce spending amid the pandemic. According to research analytics firm CB Insights, BNPL only represents a small portion of overall spending on payment cards, but it is projected to grow globally by 10-15x its current volume, topping $1 trillion in annual gross merchandise volume by 2025.

But what exactly is BNPL, and how does it work? Keep reading to learn more about this industry and some of the big names in it.

How does buy now, pay later work?

Generally speaking, BNPL programs allow consumers to make a purchase and pay for it in installments. The BNPL company will pay the full amount to the retailer and then the consumer pays the BNPL company back over time. Compared to a traditional credit card where a borrower can pay a minimum monthly payment and carry a balance, with BNPL, a borrower pays off the loaned amount for the single purchase, typically in four installments. In many cases, there is also no interest paid to BNPL providers as a borrower would pay with a credit card.

How do buy now, pay later companies make money?

Many companies in the BNPL industry make money on fees they charge to retailers that offer their services. Retailers that are willing to pay these fees do so with the hope of increasing sales. A customer may be more willing to make a purchase, especially one with a bigger price tag, if they can pay interest-free over time rather than in one lump sum.

Although it is less common, some companies will charge interest to the consumer and do not charge retailers any fees. In this case, a consumer makes a purchase, which they can then pay in installments over time, but including interest.

What companies are in this industry?

Some of the big names in the BNPL industry are fintechs. Some examples are Klarna, Affirm and Afterpay. Afterpay, one of the pioneers in BNPL according to the Financial Times, made headlines recently on August 2nd when Square Inc. announced that it would be acquiring the company for $29 billion.

As the BNPL industry grows, so does the competition, and larger companies are entering the market. For example, PayPal introduced its ‘Pay in 4’ BNPL program back in 2020. More recently, Apple announced in July that it would be launching a BNPL service called Apple Pay Later, in which it will use Goldman Sachs as the lender for the loans required for the installment offerings.

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The information in this article is not written for advisory purposes, nor does it intend to recommend any investments. Please be aware that facts may have changed since the article was originally written. Investing involves risks. You can lose (a part of) your deposit. We advise you to only invest in financial products that match your knowledge and experience.

Sources: Bloomberg, CB Insights, Reuters, Nasdaq, Motley Fool, Forbes, MarketWatch, Afterpay