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BNPL schemes are alluring but they could hurt later

The Bank of International Settlements (BIS) statistics show that fewer people are using cash for payments across many jurisdictions. China and Sweden stand out as cash-lite societies, and more countries are following suit. Region-wise, Asia-Pacific beats the rest in terms of the adoption of digital payments.

Exciting innovations and proliferating online shopping have underwritten the rise of cashless payments.

Speaking of eCommerce, 18% of the 2020 global retail sales – valued at $4.28 trillion – happened online. E-commerce’s share of global retail sales is expected to clock 21.8% in 2024.

It helps to note that the younger generation is the one driving the adoption of eCommerce. Millennials shop online not only for convenience but also because of the pay later solution. The Buy Now, Pay Later, or BNPL schemes are flourishing, especially in South East Asia.

BNPL, How Does It Work?

Nothing is more appealing to a consumer than buying now and paying later. The point-of-sale financing solution enables customers to select a plan and pay for a product/service in installments instead of settling the entire cost on the go.

You guessed it, BNPL is an iteration of financial tech (FinTech). Pay Later solutions to address specific pain points in the online shopping space, especially the high fees associated with credit cards.

The Pay Later feature comes into play at checkout. A consumer receives the product/service, but the payment is spread over a specified period, often 30 days. Interestingly, consumers who sign up for BNPL are not subject to interest or extra fees.

Signing Up for BNPL Schemes Equates to Taking on Debt

The fascinating aspect of the Pay Later solutions is convenience. It means consumers can indulge their sense of class without having cash on them. Perhaps this explains why more consumers in India pivoted to BNPL schemes in the thick of the coronavirus pandemic.

The sudden stop in economic activity in India hit the country’s young harder. But this is also the demographic that makes the bulk of online consumers. Therefore, point-of-sale financing was a godsend for many Indian millennials. Even those who shopped offline had to transition to access the BNPL schemes.

An average pay later service in India charges a minimum of Rs 250 ($3.42) for late payment, often after 15 days. Some BNPL schemes, such as Kissht, charge 21% annual interest on overdue bills. For those using ePayLater, they will pay 36% yearly interest for defaulted accounts. Thankfully, many Pay Later service providers accept the conversion of pending bills into equated monthly installments (EMIs) for up to one year, but at a steep cost.

Therefore, BNPL facilities are debt obligations and could get more expensive than traditional loan products when defaulted.

Unregulated BNPL Facility Uptake Could Ruin Consumers’ Credit Score

There is no problem with millennials rushing to snap up Pay Later offers as they appear. It helps to note that the young generation’s spending habits differ from their older counterparts and prefer seamless checkout.

But as more BNPL companies partner with retailers to target more consumers, the unregulated uptake of the facility is becoming a concern. The biggest problem here is the millennials’ perception of BNPL solutions. Few, if any, do not view the solutions as debt spending.

Whether you choose a credit card or Pay Later solution, they all amount to debt spending. Although BNPL companies have comfortable restricting arrangements on defaulting, consumers should be aware that this could adversely impact their credit score.

In short, consumers should pay keen attention to the BNPL schemes to avoid debt entrapment. Specifically, they should read the fine print to avoid being trapped by dodgy language.

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