Buy Now Pay Later - Does your business really need it?

Buy Now Pay Later schemes have been featured in the news a lot recently, but the validity of their use depends on who you're speaking with. On the one hand, they're an easy way for consumers to make a purchase without forking out the entire amount at once - but on the other hand, they're an easy way for consumers to get into debt.

With nearly a third of New Zealanders using a Buy Now Pay Later (BNPL) service in the last three years, let's take a look at whether introducing such a scheme into your eCommerce business is actually worth it.

What is a Buy Now Pay Later scheme?

It's all there in the name - a BNPL scheme allows consumers to purchase goods or services without paying the full amount upfront. The consumer pays a small deposit at the point of purchase but pays the rest in smaller scheduled installments via a third-party platform such as Klarna, Afterpay, or Humm. These platforms usually offer interest-free, no-fee services - as long as the scheduled payments are made on time.

Although it seems like an affordable option for consumers and an easy way for businesses to increase sales, the cost for both the business and the consumer may be higher than you think.

What's the risk to the consumer?

Many people believe that because no interest or fees are charged, there's nothing inherently wrong with a BNPL scheme, but the statistics have proven otherwise.

According to Consumer NZ, one in five Kiwis accumulate debt via BNPL services, and that's mostly because 39% of these purchases are made via credit cards; although BNPL schemes don't collect interest, credit cards most definitely do.

When we consider that over 50% of the younger generation have used a BNPL service over the past few years and that 90% of people who use BNPL services also have other debts on top of this debt, the future isn't looking good for our young people. But when it comes to the regulation of these kinds of services, there isn't much real scrutiny going on.

Because BNPL schemes don't charge interest and they don't check whether an applicant is able to pay back what they owe (an issue in itself), they're not included in the Credit Contracts and Consumer Finance Act 2003 (CCCFA). This means that they don't have to comply with responsible lending obligations under this act - not ideal for protecting vulnerable consumers.

What's the risk to businesses?

It's not so much a significant risk to businesses to have a BNPL offering for their consumers, but from an ethical and monetary standpoint, you need to ask yourself if it’s the right option for you.

You may have been wondering how BNPL schemes make their money if they don't charge interest or fees. One way is through late payments, but it's mostly through what they charge businesses to offer their service. Statistics from some BNPL providers indicate that in 2020-21, around 68-82% of their revenue was generated through fees charged to businesses.

In fact, merchants pay more per BNPL transaction than they would a typical credit or debit card transaction. For a credit card purchase, you might pay a 1.5% transaction fee, but for a BNPL transaction, you're looking at paying around 5-6%, with the likes of Afterpay also charging an additional 50c per transaction.

If you're considering implementing a BNPL service, you'll also need to think about what you're selling and whether it's suitable for such a scheme when it comes to those vulnerable consumers.

For example, a liquor store in east Auckland excitedly announced they were offering a Buy Now Pay Later option for their customers. However, this was quickly retracted as they faced a backlash for enabling vulnerable consumers easy access to alcohol, as well as potentially sending them into a spiral of debt to purchase said alcohol.

What's the verdict?

We’re not saying don't use Buy Now Pay Later schemes in your business - we understand that making it easy for customers to purchase is key for creating revenue. We just think it's important for you to consider the implications for your business from a cost perspective as well as an ethical point of view.

Although over a third of New Zealanders use these services, there's still a majority that don't, and the fees you're charged might not be worth it to your bottom line. You don't need Buy Now Pay Later services to run a successful eCommerce business - and if you can avoid exorbitant fees and contributing to consumer debt, your business will be all the better for it.