Buy Now, Pay Later (BNPL) is a type of short-term financing that allows consumers to make purchases and pay for them after the purchase, often with no interest if payments are made on time. Often, BNPL offers consumers the flexibility to split the cost of their purchase into smaller, more manageable payments over a period, typically ranging from a few weeks to several months. This option is usually offered at the point of sale, both online and in physical stores, making it a convenient and appealing alternative to traditional credit cards.

While consumers benefit from delayed or interest-free payments, the cost of BNPL services is typically borne by merchants. BNPL providers charge merchants a fee in the same way any other payment method is charged to the merchant.

Typical features of BNPL include:

• Available at checkout either online or in-store

• Instant approval at time of purchase

• Available for smaller amounts (normally $100-$1000)

• The BNPL provider pays the merchant immediately in full and charges the merchant a small fee

• Consumer receives their goods immediately

• Consumer pays the BNPL provider back over time

• Normally no interest or fees for the consumer if repayments are made on time

How does BNPL differ from credit cards?

While both BNPL and credit cards provide consumers with ways to defer payments, they differ significantly in structure, cost, and incentives:

Revolving vs. non-revolving credit: Unlike credit cards, BNPL loans are normally non-revolving; each transaction is approved individually, and repayments are fixed over a short-term schedule.

Interest-free vs. high-interest: BNPL loans are usually interest-free, provided the payments are made on time, while credit cards often carry high interest rates, with APRs typically around 30%. This can quickly increase the cost of credit card debt if balances are not paid in full.

Repayment structure: Credit cards allow consumers to make minimum payments while carrying a balance, which incurs interest charges. In contrast, BNPL requires full repayment according to the agreed-upon schedule. While late fees may apply, they are generally capped and not the primary revenue source for BNPL providers, who mainly drive revenue through merchant fees.

Incentives for responsible borrowing: With BNPL, if a consumer fails to repay on time, they are usually restricted from accessing new loans from the same provider until they catch up on their payments. This structure aligns the incentives between consumers and BNPL companies, as responsible repayment is encouraged. Credit cards, however, profit when consumers carry balances and incur interest, leading to higher default rates and outstanding debt levels.

What are the types of BNPL?

Although there are many flavours of BNPL across the globe, the key thread among them all seems to be enhancing access to consumer friendly financing. There will undoubtedly continue to be more innovation in the space across more sectors and regions. Here are the predominant BNPL products as of 2024.

Short term Instalment Plans (usually Pay in 4 or Pay in 3).

This is the most widely recognised form of BNPL. It allows consumers to split their purchase into equal instalments, typically paid biweekly or monthly. For a Pay in 4 option, the first payment is made at checkout, and the remaining three are automatically charged to the customer's linked payment source at biweekly intervals. In the US, providers like PayPal, Klarna, Afterpay, Zip, Affirm and Sezzle are known for this model. These plans are often interest-free if payments are made on time.

In Europe, Pay in 3 is the more common model where that works just like the Pay in 4 model, but the cost is split into 3 monthly payments instead of 4 biweekly payments.

There are also variants to the model, such as Pay in 2, where the purchase is split into two payments, typically made over a short period. Then certain providers offer extended instalment plans, like Pay-in-6, which stretch the repayment period over six repayments.

Pay-in-30 (Deferred Payment)

In this model, consumers can delay payment entirely for 30 days after the purchase is made. This allows the customer to pay nothing at checkout out, receive the product and return it if necessary before payment is due. This is particularly useful for online shoppers who may want to try items like clothing or electronics before committing to payment. Klarna popularised this model and is often likened to a digitised method of invoice settlement.

Monthly Instalments (BNPL as a Credit Option)

For higher-priced items, many BNPL providers offer instalment plans that stretch over a longer period, such as six, twelve, or even twenty-four months. These plans may come with interest, depending on the length of the payment term. Companies like PayPal, Affirm, Klarna and Zip often offer this option, positioning themselves as alternatives to traditional personal loans or credit cards.

Merchant-Financed BNPL

In this model, merchants themselves offer BNPL options at the point of sale without involving a third-party BNPL provider. This is common in industries such as automotive, electronics, and furniture retail, where large-ticket items are frequently financed directly by the seller. The terms vary significantly, and these plans may carry interest or fees depending on the merchant.

Virtual Card BNPL

Some BNPL providers offer virtual cards that customers can use to pay for purchases wherever debit or credit cards are accepted. The virtual card is linked to a BNPL account, and the transaction is divided into instalments. This allows the flexibility to use BNPL beyond the specific retailers that offer it, making it more like a traditional credit card. Providers like Zip offer virtual cards for their users.