Rise of BNPL

Buy-Now-Pay-Later is a financial solution enacted to alleviate the economic burden of the purchase of an item or service online in favor of the consumer. This new way of online payment first emerged in Europe in 2012 and later spread in the US; however, the concept is not a newcomer; in fact, the BNPL concept dates back to the 19th century, when companies and department stores offered consumers installment plans for purchasing big-ticket items like furniture, farm equipment, and other frequently out-of-budget goods. In the 1890s, Singer sewing machines popularised the “dollar down, dollar a week” payment plan. The practice consists in breaking down the total cost of the desired good/service into usually 3 or 4 monthly instalments in addition to the down deposit that will be charged as soon as the purchase is validated; then the subsequent payments will be automatically processed within the agreed time span. In addition, in some cases the payment plan can also be adjusted to suit the consumer's needs.

How does it work?

An intermediary institution (your bank) pays upfront for the entire purchase amount. You then repay the bank through a series of fees that add up to the value of the upfront payment, typically without interest. However, if your chosen account lacks sufficient balance, penalty charges proportional to the instalment amount will be triggered; thus, the higher the tranche, the higher the monetary penalty will be.

Why do they offer this?

This mechanism efficiently encourages customers to make more purchases by spreading costs over a short period. However, this system may sometimes lead consumers to make unsustainable purchases due to miscalculating or mismanaging their financial resources; in fact, the feasibility evaluation and credit score assessment of the transaction are not as thorough as in other mechanisms such as loans and mortgages; therefore, they are simplified due to the operation's rapid nature and the typical price of the goods and services provided, which are usually no more than a couple of hundred euros/dollars. In 2024, according to EMARKETER 93.3 million US consumers will use BNPL services. Users will continue to increase annually through 2027, though growth will taper due to increased competition. Though not as prevalent as debit cards (55%), credit cards (53%), or PayPal (49%), BNPL was used by 11% of US digital buyers to make a digital purchase in April 2024, according to an EMARKETER survey conducted by Bizrate Insights. As consumers look for credit card alternatives to avoid accumulating debt, BNPL has emerged as an appealing way to complete a purchase due to its ease and flexibility of use that blends the benefits of credit, short repayment terms, and app-based shopping.

Regulations

BNPL services in the European Union (EU) are regulated by the Consumer Credit Directive (CCD). The CCD2 regulation, which came into force in November 2023, introduces new rules to protect consumers. On the other hand, in the US, BNPL services are regulated by the Consumer Financial Protection Bureau (CFPB) and some state governments. The CFPB has issued an interpretive rule applying credit card consumer protection rules to BNPL lenders. While some states classify BNPL as consumer credit and require state licensing or registration, others waive these requirements for BNPL products that charge no interest or finance fees. BNPL providers may also be subject to regulations governing:

• Credit reporting and responsible lending practices

• Advertising and marketing

• Terms, fees, and interest rates

• Fairness, transparency, and protection against unfair practices

References and Further Reading

“All signs point to increased US regulation of Buy Now, Pay Later” (Norton Rose Fulbright)

“Buy Now Pay Later” (Banca d’Italia) 

“Guide to Buy Now, Pay Later: Industry trends, regulation, and top companies explained” (EMARKETER)

“New BNPL rules in the US: financial resilience is key” (GrantThornton)

“Regulation Around the World” (Norton Rose Fulbright)

“US consumer watchdog will apply credit card rules to buy now, pay later companies” (Reuters)

“Where Buy Now Pay Later is going in Europe” (Deloitte)