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Buy Now Pay Later (BNPL) platforms allow consumers to make purchases in installments over time instead of paying the lump sum price all at once. The trend of offering this option is growing in popularity in the United States

So what does this say about the habits of today’s consumers?

Most consumers  have been in a situation where they wanted to buy a big-ticket item but could not justify dropping so much cash in one sitting. But, think back to the 80s, 90s, and early 2000s, when infomercials were prevalent – although the ads were notoriously cheesy, they did in a way invent the concept of payment via installments. It was only a matter of time before that option was offered on eCommerce platforms. 

How BNPL Works

Popular platforms like Afterpay typically let users pay in four installments over a six-week period. Most also offer a companion app or web browser plug-in to equip payment with the merchant’s website to allow for a seamless integration. 

User accounts are typically linked to a debit card or bank account, where payments are taken out automatically. They also offer automated reminders when an automatic payment is coming up, which is nice considering we’ve all had “surprise” funds exit our bank account because we forgot we joined Planet Fitness two years ago (or maybe that’s just me).

As a user makes more on-time purchases with the platform, their spending limit grows. That limit could be $2,000 on Afterpay and $1,000 on Klarna, the amount varies by platform.

Most platforms don’t charge interest to the customer, making money mostly off of retailer fees and those sneaky late fee charges. Affirm, however, does charge interest on some transactions.

Behind the Psych 

The upward trend of these types of BNPL platforms can be partially accredited to the basic psychology of the concept. 

The instant gratification of a purchase coupled with delaying the pain of parting with any money in the blink of an eye, allows buy-now-pay-later lenders to exploit humans’ natural tendency to undervalue future losses and overvalue present satisfaction. This is known as present bias, or recency bias. Research shows that this bias increases in response to instability and stress, raising the worry that such services disproportionately target consumers who are already vulnerable. It directly targets those who already have financial struggles because the ‘high’ of a bigger purchase keeps most people coming back for more. 

Lenders usually set their targets on small luxuries like clothing and cosmetics, which are typically the subject of impulse buys. Focusing on products related to physical appearance, and targeting a particular age group, could shift social norms regarding consumption within the demographic, making higher value clothing items the norm. When you couple this with companies like Rent the Runway, the accessibility rises for some, making those financially unstable feel like it’s just out of reach for them, further emphasizing the gravitation towards BNPL. 

But is this persuasion, or more insidious manipulation? Fast Company points out a distinction made by Aristotle to help illustrate the point: 

“In a debate with the Sophists (specialists in the art of persuasion), the Aristotelians argued that the difference between manipulation and other persuasive strategies is that it bypasses or subverts the target’s rational capacities.

On that rationale, buy-now-pay-later apps are arguably manipulative as they rely on our irrational psychological biases. The concern is, therefore, less that they encourage us to spend, but how they do it.”

The Dark Side  of BNPL

These platforms are, as hinted previously, controversial. Many critics allege that these platforms are schemes at the end of the day, encouraging overspending, potentially ruining customers’ credit histories, and preying on the weak. Many see parallels between these schemes and notorious “payday lenders” from decades ago from companies like Wonga.

In fact, in the U.K., four in ten customers who have used these apps in the last 12 months are reportedly struggling to repay. Roughly 25% of consumers reported that they regretted using these platforms, with many saying they cannot afford repayments or are spending more than they expected. Compare the Market also reported that one-fifth of users couldn’t repay Christmas spending without taking on more debt.

This sparked an investigation which resulted in regulations put in place to treat consumers more fairly. 

But there’s definitely a more positive future in store for BNPL.

What’s Next?

Recently, Visa announced a collaboration with mega-processor Global Payments to allow Canadian merchants to offer buy now pay later options to eligible card holders at the point of sale. While Visa has offered the service directly to consumers in other countries, it was never available directly at the point of sale.

Visa is pushing into the Canadian BNPL market as adoption of installment payments climbed by 30% in the last year. Also, as part of Visa’s tie-up with Global Payments, the credit union Desjardins will now be able to offer the BNPL option to eligible cardholders in Canada.

Installment payments represent a rapidly rising slice of the payment market at about $1.3 trillion of global payments volume.

As long as regulations are in place to protect vulnerable consumers, BNPL could allow those who could never afford small luxuries, to indulge in a safe, responsible way. And as the market rises rapidly for installment payments, we could see more buy now pay later options directly at point of sale.