How Buy Now, Pay Later works
Buy Now, Pay Later (BNPL) is a payment method that allows consumers to pay for a purchase in instalments over a specified period of time - usually monthly or biweekly. Consumers do not incur any interest as long as payment is made within the specified time period.
The payments are handled by BNPL providers. They define a clear repayment schedule and users know the amount of each payment in advance. They also assume responsibility for outstanding payments. In return, merchants pay fees but benefit from receiving the full amount immediately instead of having to wait for successive instalment payments from customers. This approach optimises the merchant's liquidity and minimises their credit risk at the same time.
The importance and development of BNPL
Buy Now, Pay Later has experienced a significant boom across Europe in recent years, notably accelerated by the COVID-19 pandemic. The rise in e-commerce spending during the pandemic played a crucial role in this expansion. As consumers increasingly turned to online shopping, various online payment providers specialising in purchase on account saw an opportunity to further develop this payment method for online shopping. Originally focussed on beauty and clothing purchases, BNPL has successfully expanded into various sectors, which underlines its increasing popularity.
The BNPL trend remains unabated to this day. Especially in the current economic situation characterised by inflation, high energy prices, and rising interest rates, consumers desire flexibility in payment. Examining the trend in private credit acquisitions illustrates the significance of Buy Now, Pay Later: According to the SCHUFA Risk and Credit Compass 2023¹, small loans under €1,000 experienced a 90% increase from 2021 to 2022. Much of this growth is attributed to the proliferation of BNPL offerings in e-commerce.
For the future, Juniper² forecasts that the BNPL market will reach a volume of $895 billion by 2027. This development is supported by the increasing number of BNPL users worldwide, expected to surpass 900 million by 2027, representing a 157% increase compared to 2022.
BNPL: High popularity among Millennials and Generation Z
The adoption of Buy Now, Pay Later extends across all demographic segments and income levels, as indicated by a study conducted by PYMNTS and Amount³. Millennials and Generation Z, in particular, appreciate the benefits of BNPL. According to this study, over 60% of Millennials are among the consumers who would use a BNPL plan issued by a bank. Among Generation Z, 54% expressed interest in using BNPL.
What makes BNPL particularly appealing is the financial flexibility it provides. Consumers only need to make payments once they have received the entire product and are satisfied with it, offering protection against unscrupulous providers. Additionally, the amount to be paid is adjusted in the case of returns, eliminating the need for consumers to pay in advance. This desire for security is particularly pronounced, especially with expensive products or fashion items, where consumers often expect returns.