What is Buy Now, Pay Later?
Disclaimer: Banríon Broadcasts is not a financial advisor. Although all articles are heavily researched before publication, it is important that you take the advice of a financial professional if you are in any doubt.
Buy Now Pay Later (BNPL) is a form of credit that is becoming more and more popular in Ireland. In this article, we will be discussing the benefits, disadvantages, and alternatives to this credit line.
BNPL is a service by which consumers can buy items in instalments, usually over three payments. Klarna was one of the first companies to launch a BNPL scheme in Ireland, which happened in November 2021. They got 38,000 app downloads a month later (MABS 2023).
The key points to remember about BNPL are that:
It is a form of credit, not simply an alternative payment method.
There are potential risks associated with using this method, so any engagement should be carefully considered.
Advantages
That is not to say that there are no advantages to using BNPL, quite the opposite. There are typically no interest charges or late fees associated with these services, meaning that (in theory), BNPL simplifies and streamlines the financing process. In addition, there is no intense credit check required with BNPL, since withdrawals come directly from your bank account (NASDAQ and Chang 2023).
Disadvantages
However, there are quite a few potential pitfalls to using this service.
BNPL is heavily associated with impulsive or excessive spending. 38% of BNPL users agree that BNPL has made them “more likely to purchase things they don’t need’ and 43% agree they ‘often spend significantly more money than planned when they use BNPL” (Central Bank 2023).
Many consumers see BNPL as a payment method, rather than a line of credit. The Central Bank of Ireland found that when availing of BNPL, consumers tend to be focused more on the monthly payment amount, rather than the total amount borrowed at the point of purchase. Consumers also reported that the BNPL experience lacks the formality of borrowing for a loan, which naturally leads to less thoughtful spending.
Although there are often no fees if you pay on time, the fees can quickly rack up if you’re late.
According to the Consumer Financial Protection Bureau (CFPB), close to a third of BNPL users have struggled to make the payments and to avoid defaulting on their plan, they had to skip paying an important bill. As a result, close to 1 in 4 (22%) Americans who have used BNPL have immediately regretted their decision, saying they wished they had not signed up for the plan (NASDAQ and Chang 2023).
Although BNPL may cause as much long-term damage here in Ireland, due to a lack of centralised credit scores, the Central Bank did find that consumers are simply not considering that they may be charged fees (Central Bank 2023).
Protection in Ireland
So what kind of protection do we have in place in Ireland for this new and emerging form of credit?
In May 2022, the Central Bank extended their remit to cover any BNPL providers, which caps their interest rate at 23%. Providers and servicers will now also need to be authorised by the Central Bank (Central Bank and Cross 2022).
Agreements will now be covered by the Central Bank’s consumer protection framework. This covers a wide area of protection, but the key elements are that consumers are provided with:
Clear Communication: BNPL providers must clearly tell customers about repayment schedules, fees, interest rates (if any), and what happens if payments are missed.
Responsible Lending: Providers must make sure customers can afford what they're borrowing without getting into financial difficulty. Essentially, they need to check if customers can pay back the money without struggling.
Fair Treatment: BNPL companies must treat customers fairly. This means their advertisements, marketing, and how they talk to customers, must be fair, transparent, and compliant with regulations.
Trained Staff: People working in BNPL services need to possess the necessary knowledge and skills to fulfil their roles effectively.
A System for Handling Complaints: They need to listen to customers' problems and sort them out promptly and fairly. This is all about being open, easy to reach, and solving issues fast, following the rules in the Consumer Protection Code 2012.
Alternatives
If BNPL is no longer of interest to you, what are some alternatives that you could consider? The Money Advice and Budgeting Service has made an extensive list, which we have summarised here (MABS 2023).
We like to think of this as a thought process before using BNPL:
Is this item a necessity right now? Saving up for it may be better in the long run.
Can you source it cheaper or for free? Done Deal, Facebook marketplace, and adverts.ie are all great resources for locating deals on items.
Can you afford to just pay for it now? There is no need to use BNPL if you can afford it straight away.
Do you have savings you could use? These may be easier to rebuild rather than opening a line of credit.
If this is an item that you need, that you cannot afford, save up for, or find cheaper anywhere else, a small Credit Union loan is a potentially more sustainable option.
A Credit Union loan is an excellent way to pay for an item like we mentioned earlier, as the maximum interest rate that they can charge is 12% vs 23% for BNPL. If you are in receipt of social welfare, the ‘It Makes Sense’ Credit Union loan could be a great option. You can read more information about it here.
In conclusion, we here at Banríon Broadcasts feel that BNPL as a service is a very mixed bag. It is still quite new to the Irish market, and we will have to wait and see the effects of this service over the coming years.
References
Central Bank. 2023. “Buy Now, Pay Later – do you know you are taking out a loan?” Central Bank of Ireland. https://www.centralbank.ie/news/article/press-release-buy-now-pay-later-do-you-know-you-are-taking-out-a-loan-14-november-2023.
Central Bank and Gerry Cross. 2022. “Central Bank announces new consumer protections on the commencement of Consumer Protection (Regulation of Retail Credit and Credit Servicing Firms) Act 2022.” Central Bank of Ireland. https://www.centralbank.ie/news/article/central-bank-announces-new-consumer-protections-on-the-commencement-of-consumer-protection-(regulation-of-retail-credit-and-credit-servicing-firms)-act-2022.
Deloitte. 2022. “Buy Now Pay Later Risks and Rewards.” Deloitte. https://www2.deloitte.com/us/en/pages/advisory/articles/buy-now-pay-later-risk.html.
MABS. 2023. “Buy Now, Pay Later - What do I need to know? - MABS.” Money Advice and Budgeting Service. https://mabs.ie/blogs/buy-now-pay-later-what-do-i-need-to-know/#.
NASDAQ and David Chang. 2023. “The Dangers of Buy Now, Pay Later.” Nasdaq. https://www.nasdaq.com/articles/the-dangers-of-buy-now-pay-later.