Buy Now, Pay Later: is financing that Black Friday burrito really worth it?

Buy Now, Pay Later (BNPL) providers have rapidly taken over online checkouts. Now, it’s become impossible to visit any online vendor without seeing the soft pastel colours of Klarna or Afterpay; slowly dominating and becoming the primary method of payment for the younger shoppers. The prospect of paying four small instalments – no interest charged, if paid on time. This makes the hard pill of the total price much easier to swallow.

BNPL providers like Klarna, Affirm, Afterpay operates as such: the shopper pays a quarter of the total price upfront and the BNPL provider foots the rest. Then the shopper must pay the remaining amount in 3 instalments over the next few weeks. If paid on time, the loan comes interest-free. Ultimately, BNPL providers profit from shoppers accumulating much more debt than they can keep track of. As many shoppers often mindlessly use BNPL as a “problem for future me”, unaware of how much debt is accumulating without notice. This ultimately spirals into late payments, late fees and then repayment options with interest, trapping the shopper in an endless cycle of debt and delinquencies.

The main selling point of BNPLs is that they don’t require the amount of scrutiny compared to traditional creditworthiness checks. Instead, using soft checks that check the credit score range, basic credit history and major delinquencies (when payment on a loan has been unpaid for 90 days). As these checks aren’t hard inquiries, these soft pulls won’t affect your credit score or visible to other lenders who check your credit report. This makes BNPL more attractive to low-income consumers, young people with thin credit files, students and the unemployed.

Unsurprisingly, the business model of relying on those with unverified incomes for profit makes the business difficult to sustain. BNPL providers mainstream of revenue is from merchant fees. Whenever BNPLs are used in checkout, the retailer pays the provider with a flat fee and a portion of the sale cost. Whereas the provider takes on the non-payment risk, then the shopper is put on a 4-part payment plan to pay back the loan – interest free. However, as BNPL providers are typically targeted and used by consumers with unstable or unverified incomes, default and delinquency rates would be higher than typical. Subsidising these interest-free loans would mean the BNPL providers would have to foot the cost of capital, non-payment risk and operation costs entirely, without having earned interest to cover basic operational costs. Further, missed payments and having to shoulder the non-payment risk would quickly deplete any revenue earned from merchant fees. Despite the high transaction volume of, for example, Klarna - with 100 million active users and 724,000 merchants, many BNPL providers actually struggle to keep up, lacking the funds to be able to shoulder all the costs of loans, operations and non-payment risks.

Especially after a post-covid financial strain and higher cost of living, many young adults turn to BNPL to be able to afford larger purchases they otherwise would not be able to afford. According to LendingTree, more and more users have been relying on BNPL for basic groceries – with 25% of BNPL users reporting to have used the loans to buy groceries. BNPL providers like Klarna have been seeing a significant rise in users – 114 million active consumers. No doubt driven by the rising prices of everything and the lagging rise in wages, making everything – including groceries – feel unattainable.

The success of the BNPL providers is also due to the mitigation of the pain of paying. Every time we spend, whether it be with physical cash, the swipe of a card or the tap of a phone we experience distress and disgust coined the pain of paying. By splitting the big price tag into 4, the price tag seems less daunting. For example, a £100 purchase would feel like a £25 now whereas the other £75 for “future me” is an afterthought rarely considered. These BNPL providers play into our nature to be loss averse and minimise the current loss taken by splitting the cost into 4 – now seemingly more manageable – instalments.

However, shoppers often fall into the trap of accumulating so many BNPL loans. Accumulating numerous fragmented micro-debt that is much more difficult to manage due to how they’re typically split across different instalments on different days, as opposed to a traditional credit card that is paid off all at once. Shoppers, on top of struggling with finding the money to pay back their loans have to find a way to organise their overlapping plans as payments are scattered across different time frames. This poses a problem as BNPL debts do not appear on credit reports, making BNPL loans very difficult to track. Especially since many shoppers may see them as an insignificant amount once split into 4 – until they begin to accumulate into one big debt. This can lead many shoppers into a spiral of debt where their different BNPL plans and late fees accumulate quickly – spiralling into delinquencies, overdraft fees, or even damage to credit scores.

This Black Friday, even with discounts and bundled deals, prices still feel higher than ever — making the temptation to split the total into four small instalments especially enticing. However, it is that reasoning that tricks so many shoppers. At the end of the day, no money is saved, the same amount – sometimes even more – is owed, now not to the retailer, but to a massive corporation wishing for your inability to pay back to syphon even more from your wallet.