Buy now, pay later. It’s a simple and evocative term for a growing financial service that offers precisely what the name suggests – the ability to buy something without having to pay for it till a later date. Unlike revolving credit, the main sales pitch for the scheme is that if you make your payments on time, you do so with zero interest and zero additional processing fees.
The continuing push into this growing lending space was the topic of discussion at a recent webinar hosted by FinTech news outlet The Fintech Times.
“We’ve seen, on a macro level, a difference in the way people pay since the start of the pandemic,” said Alex Marsh, Head of UK at Swedish FinTech Klarna. “Payments on credit cards went down $60 billion in 2020, and we’ve seen that shift over to debit.”
One of the trends driving this shift is the need consumers have at times for greater payments flexibility, Marsh said. Consumers may be purchasing online and want to try before they pay because they don’t necessarily trust the service, or they may want to manage their cashflow more tightly.
For people who can make those payments, this can be an excellent deal – particularly when compared to the frequently high APR offered on credit cards that people with lower credit scores can obtain. That can make a real leveling of the playing field for people without access to traditional loans – but they need to be cautious to read the fine print, because missed or late payments can quickly make the whole process expensive from many services.
“A lot of this is about communication; it’s about consumer protection,” said Sarah Williams-Gardener, CEO of not-for-profit member organization FinTech Wales. “I think we really need to be clear that when we say there is no interest, that people know how long there’s no interest. I think all of these things have a place, and they’re all serving a consumer need and requirement, but we need to communicate them really clearly, so we don’t encourage people to get themselves into financial difficulty.”
But that communication isn’t universally clear – while some good actors, like Klarna, never charge any late fees or let any debts accrue interest, as with anything it’s important for consumers to do their own research, because there’s a lot of bad actors taking advantage of the trend to pull people into revolving fees as a primary revenue source. That, of course, is nothing new – a myriad of bad credit cards have operated in the same fashion for many years.
“Why has there been that shift from credit cards across to debt?” Alex Marsh said. “You go in with the best intentions with a credit card, but behavioral science shows us that often, when people are given a credit limit at a facility, it actually encourages them to buy up to that limit, with the intention of being able to repay it, but too often people aren’t able to.”
Klarna’s method sidesteps this issue by doing qualifying checks each time someone wants to make a purchase, effectively making micro-loans for single transactions – others do it differently, like services that offer company employees early access to their payroll in exchange for repayment come payday.
These providers can avoid the usual revenue models of the older credit card companies by charging fees to merchants and banks that let their customers utilize these services – as a value add for the bank overall offering greater credit flexibility to their clients. For financial institutions, it’s a smart play that can ease cashflow burdens on many clients who might otherwise have to turn to revolving credit to meet their needs.