By: Gerhard Janse van Vuuren
A new, user-friendly, streamlined payment plan, Buy Now Pay Later (BNPL), is disrupting the global and South African retail, lending, and digital market industries by allowing consumers to spread the cost of goods over a series of interest-free payments.
The mass adoption of this new version of the classic instalment payment plan is changing consumer behaviour. Established companies like Takealot, Amazon, and Google benefit, while others, like Visa, Mastercard, and banks, face increased competition in some areas. However, BNPL providers must balance the rewards of providing quick access to finance with the risks arising from limited credit checks.
BNPL offers short-term financing, allowing consumers to spread the purchase cost over different instalments without paying interest. In South Africa, for instance, platforms like Takealot have partnered with PayFlex, enabling consumers to pay a quarter of their basket value immediately and the remaining three instalments biweekly. This model appeals to many as it is a quick way to purchase without the need for lengthy approval processes.
The appeal of BNPL lies in its simplicity and flexibility. By spreading payments, consumers can afford more expensive purchases, making them attractive to cash-conscious shoppers. This has led to an increase in conversion rates for online retailers and, importantly, allows BNPL providers access to valuable data on spending patterns, which they can also monetise.
How do BNPL companies make money?
While consumers can often access BNPL with no added costs, providers generate revenue in a few ways. First, they charge retailers like Takealot and Amazon a fee for each purchase, as they are essentially facilitating sales. Additionally, late fees may be charged if a customer misses a payment, which provides another form of income to providers. Moreover, BNPL companies collect vast amounts of data on consumer purchases, which can be sold to advertising and marketing firms such as Google and Meta. The valuable data supports targeted advertising, creating a feedback loop that again benefits both BNPL companies and marketing platforms.
Over recent years, BNPL has become a preferred payment method, especially among younger consumers. With major retailers offering BNPL, it has become an essential part of the digital shopping experience. Consumers who may previously have been hesitant to make high-value purchases now feel more empowered to buy, given the option to pay over time. Today, the trend is so prominent that startups and established payment processors are developing their own BNPL offerings to meet this demand.
The effect of BNPL on other industries
The ripple effect of BNPL extends beyond retail. Retailers have reported sales volume and average order value improvements from BNPL. Recent studies show that BNPL users spend around 6% more than non-users. This boost in spending has lowered cart abandonment rates, with more consumers committing to purchases instead of backing out at checkout.
Credit card companies, however, are facing competition from BNPL, which offers a compelling alternative to traditional credit. Providers like Visa and Mastercard could see a dip in transaction fees as young consumers increasingly opt for BNPL rather than credit cards. Additionally, BNPL’s appeal as an interest-free option puts pressure on credit card companies to adjust their fee structures to retain customers.
Traditional banks may also feel the impact. BNPL’s growth threatens to reduce demand for personal credit and credit cards, potentially decreasing average credit card balances (albeit some studies point in the opposite direction). Meanwhile, data-driven marketing giants like Meta and Google benefit from BNPL’s growth, given the treasure trove of consumer data BNPL companies provide. This symbiotic relationship aids BNPL companies, advertising platforms, and retailers alike, driving more targeted advertising and ultimately boosting sales.
Risks not to be ignored
Although BNPL offers several advantages, it is not without risks. Many BNPL providers conduct only limited credit checks, potentially increasing their exposure to defaults. While traditional lenders carefully evaluate credit risk, BNPL providers often skip these steps to maintain a streamlined user experience. Consequently, the risk of default rises as BNPL expands, especially in periods of economic downturn.
Some companies manage this risk by bundling receivables and selling them to private investors, a tactic that transfers some of the risks off their balance sheets. If this sounds familiar, this happened in 2008 during GFC with property, but it was on a much bigger scale than BNPL.
BNPL also raises concerns about consumer overspending. The ease of making purchases without paying upfront can encourage some consumers to take on debt beyond their capacity, which could contribute to rising levels of consumer indebtedness. If unchecked, this might warrant stricter regulation to ensure that BNPL remains a financially responsible option.
Interestingly, its appeal cuts across demographics. While BNPL is most popular among millennials and Generation Z, who tend to favour flexible financing over traditional credit cards, older consumers are also beginning to explore delayed payment options. This broad appeal suggests that instalment-based purchasing could further challenge traditional credit models.
As BNPL companies continue to grow, a looming question is how they will weather economic downturns. Without rigorous credit checks, BNPL providers may struggle to manage default risk in a recession. High unemployment or reduced consumer spending could increase missed payments, impacting BNPL providers’ financial health. The industry’s resilience will largely depend on how effectively providers can handle credit risk without sacrificing their user-friendly approach.
BNPL has emerged as a transformative force within the financial landscape, driving retail, credit, and consumer behaviour changes. Its ability to make shopping more accessible and convenient has reshaped payment expectations. BNPL’s potential benefits for retailers and consumers suggest it will continue to thrive. For traditional lenders and payment processors, BNPL’s success signals the need for adaptation, as this new payment option solidifies its place in the modern economy. The BNPL trend is here to stay, and its impact will continue to be felt across various sectors as consumers and companies adjust to its presence in the marketplace.
* Janse van Vuuren is a global equity analyst at Flagship.
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