Paying in installments is common when faced with an unaffordable payment. Acquiring a course of study, buying a large appliance or paying for a high-priced trip have forced many people to turn to it traditionally. Although, with the rise of technologies during the pandemic, it is already possible to pay in installments without procedures and with lower costs, such as a pair of trousers for 20 euros or a cologne for 60. This is the so-called BNPL (of the English acronym for “buy now and pay later”). A service is offered with which the buyer, generally, “pays later in terms of between 3 and 12 months, and at no cost. It is the businesses that generally pay the deferral with interest that is between 2% and 3%”, explains Juan Carlos Martín, CEO of Card and Payment System. It started in online stores but has already spread to multiple physical stores.
Its global business volume has grown from 83 billion euros in 2020 to 170 billion in 2022 and is expected to reach a figure close to 500 billion in 2025, according to a study by Precedence Research.
The situation has been fruitful, above all, for companies in the financial sector – or fintechs -, such as the Spanish company Aplázame, which is already present in more than 1,800 businesses; or the Australian Clearpay, with more than 122,000 active businesses globally and 19 million customers. The operation is simple to attract the maximum number of people. When paying, just choose the option to pay in installments and accept through a link sent by store staff.
Various solutions
“Banks and cards do not want to lose part of the business, which is already very relevant”, says Santiago Carbó, executive director of the Financial Digitalization Observatory of Funcas. In 2021, several entities came together to create Plazox, a payment deferral system for banks and financial institutions, offered by Sistema de Cardes y Medijans de Pagamento, which has been welcomed by entities such as BBVA and Unicaja. Others, such as CaixaBank with iZZinow, have launched their own solutions. And players like Visa or Mastercard are also looking to position themselves. For example, PayPal has launched the Pay in 4 option, which allows users to pay for purchases, interest-free, in four installments.
Its use is spreading to the population as a whole, but the young generations – the millennials and Generation Z – are signing up first. The high unemployment, the difficulties to emancipate themselves and a crisis that aggravates the situation pushes them to carry out these operations. In fact, 70% of users who use this payment method are between the ages of 18 and 45, according to a Capterra study.
“We are in a more consumerist society than several generations ago and with digital solutions very present. To young people, paper money seems like a lie, while to adults it’s digital money that doesn’t seem real to them”, explains Elisabet Ruiz-Dotras, professor of economics and business studies at the UOC and researcher of the DigiBiz group .
More customers
Despite being a relatively new payment method, it is trusted by the majority of consumers (81%), although only 22% have used it. And, those who do do so are mostly in physical stores (51%), the highest percentage behind Portugal (59%), according to a report by MixFactory and Younited. Not having to pay for the postponement service is the main motivation when choosing it.
Despite bearing the cost in many cases, businesses are the main beneficiaries of this mode of payment. “Establishments increase sales and users spend more on each purchase”, says Jordi Nebot, CEO and co-founder of the Spanish fintech PaynoPain. Customers become more loyal to these brands and businesses can compete with the big sellers. The establishments that have adopted the Aplazame system, as an example, have managed to double the average value of orders and increase the recurrence of purchases by 40%.
Flexibility, ease of use and immediacy are some of the advantages that attract consumers. However, experts also warn of certain risks. Consuming without control can generate excessive debts in those who resort to this method and delinquencies in companies.
Fintechs are also facing staff cuts that are weighing on tech companies due to oversizing of workforces during the pandemic and uncertainty due to the war in Ukraine. An example of this is Klarna, which last year announced the cut of 10% of its workforce – around 700 workers. Other companies in the market have had a significant drop in the stock market, such as Affirm, which started 2022 with a value of its shares close to 75 euros, and ended with a price of just over 8 euros.
These factors, together with the lack of regulation, are some of the reasons why there is controversy about future viability. “These types of companies respond to a technological profile, which has fallen on the stock market because the cost of debt is rising and, having a high volume of debt, costs are growing”, points out Ruiz-Dotras.
According to a study by the Fundació de les Caixes d’Estalvis (Funcas), in addition to being able to charge abusive interest for late payments, the fact that some of these fintechs do not verify the credit history of their users and that, however, the credit agencies (such as Experian or Equifax) reserve the right to report on their customers’ delinquency, questioning the sustainable growth of this business model. “When you buy from a fintech you don’t know if you’re a good customer or not, while banks have a track record of customers,” adds Martín. And he points out that there is currently a willingness on the part of banking regulators to establish conditions for this type of payment and thus avoid problems.
When payment facilities are given, it means that they don’t have the money. “The problem with entering this method of financing is that you never leave the wheel”, says Josep Maria Català, associate professor of economics and business studies at the UOC. In the US, about 65% of those using these fintechs earn less than $50,000 a year. “Emotional purchases are always negative. And most acquisitions have an emotional rationale, especially on the internet,” adds Ruiz-Dotras.
Experts emphasize that financial education is the basis for making good use of it. For this, it is recommended to do household financial planning, saving 20% per month and allocating 50% to household expenses and another 20% to short-term and leisure expenses. The remaining 10% should be dedicated to training and donations.
“BNPL continues to grow. It’s here to stay. It has been proven that it is useful and that buyers and businesses want it”, points out Martín. In a crisis context, this payment method is expected to rise. Shopping with BNPL will account for 13.6% of total e-commerce spending by 2024, doubling from 7.4% in 2020, according to FIS. The professor of Economics and Business Studies at the UOC concludes that every time “people are poorer and want to continue consuming, so for many it is the only option”.