Credit cards have been a stable shopping companion for billions of people worldwide for a very long time. It was a tremendous 20th-century innovation. However, in the last few years, the credit card, as a payment option, has seen increasingly more competition for market share from new and innovative payment models.
The Buy Now Pay Later (or BNPL) option is one of them. Also called deferred payment or ‘Shop Now Pay Later’ method, the BNPL model has been around for a little over a decade now. It is currently one of the biggest threats to the traditional credit card payment model as more and more users shift to the BNPL model.
This article will look into why it is becoming increasingly popular by analyzing its benefits to consumers and retailers. We will also look at the risks of this payment model.
Finally, we will consider the 10 of the most popular and secure Buy Now Pay Later apps and service providers in the market for you to consider for your next shopping spree in 2021.
Buy Now Pay Later (BNPL) Business Model Explained
Here’s an example from Revelry, a wedding outfit e-commerce store that has integrated Klarna as a payment option.
The ‘Rosalie Tulle Convertible’ dress in this example costs $185. However, shoppers using Klarna can defer the entire payment or split it into four equal installments of $46.25.
You’ll notice that the total amount for split payments, in this case, equals the cost price. This is because Klarna, similar to most Buy Now Pay Later apps, never charges interest to the shoppers for using the service. Albeit, this is conditional, as we will cover below.
It is easy to see the appeal that these BNPL services have in the marketplace. As opposed to using credit cards, shoppers can use BNPL apps to purchase an item but choose to pay for it later.
But this is not like a hire purchase where you get to own the product after making the last installment. With Buy Now Pay Later services, you receive the item upon checkout.
The retailer receives payment immediately, just as they do if the customer pays using a credit card.
Essentially, the BNPL apps are a credit card solution adapted for the 21st-century shopper. They attempt to circumvent the shortcomings of the credit card.
The Benefits of Buy Now Pay Later Apps
We can split the benefits for BNPL service providers into two categories: benefits to consumers and retailers. Expectedly, the retailers and consumers have different goals, and BNPL apps appeal to each segment differently.
Benefits of BNPL Apps to Consumers
- Deferred payments – this is the most significant advantage of using these BNPL apps. By deferring your payment, you can keep your money longer and hopefully make it work for you. Additionally, with these apps, you can buy more stuff with the same amount of money.
- Risk-free purchases – let’s face it, online shopping can sometimes be a hit and miss. You could order an item and get the wrong one shipped. Or it could just be that the product does not satisfy your needs as expected. In this situation, you may want to return it or ask for a refund. BNPL apps ensure that you don’t have to worry about getting your funds back.
- Convenience – Speed matters these days, and having a seamless payment experience makes shopping all the more enjoyable for consumers. There are two options to using BNPL apps: shopping directly in the apps or shopping on the merchant app or web interface. Either way, you get the option to checkout with your preexisting account created on one of the BNPL apps. This can save you the need to look up your credit card numbers every time you shop online.
- Cost – credit cards are costly. Choosing an interest-free payment plan with pay later services and making your payments on time is a nifty way to save costs. You could think of this as a free loan.
Benefits of BNPL Apps to Merchants
As a merchant, there is a lot to like about the Buy Now Pay Later apps and services. Here are some of the common reasons to adopt one of the deferred payment providers as an added payment option for your customers.
- Increased sales – if you allow your customers to pay in installments, they are more likely to buy higher ticket items or buy more items from you. Coupled with the fact that these deferred payments are interest-free, it makes the decision a no-brainer for your consumers. Additionally, by offering more payment options, you help reduce cart abandonment issues. Research from Baymard Institute shows that retailers are losing as much as 6% of their potential sales due to a lack of enough payment options.
- Access to new customers – Buy Now Pay Later apps integrate their merchant interfaces into their shopping marketplaces allowing the shoppers to have a more comprehensive selection of goods from various retailers. This means a higher chance of getting new customers as a retailer that may not have otherwise chosen to shop in your store.
- Build trust and loyalty – the BNPL apps increases customer loyalty and confidence by allowing them to order items and make the payment once they have received them. They also don’t have to deal with the hustle of processing refunds if the goods are unsatisfactory.
- Keep up with the competition – the BNPL apps are increasingly becoming more popular. The chances are that your competition has embraced or is seriously considering it as a new payment option for their customers.
Risks of Adopting Buy Now Pay Later Apps
We can also split the risks into two categories: those to consumers and those to the retailers.
Risks to consumers
- Encourages consumer debt – not to forget, the BNPL service is a loan product. Some consumers will likely misuse it and find themselves with more debt than they can handle.
- Impact on credit score – depending on the BNPL app, the consumer’s credit score could be impacted due to late payments and loan defaults.
- More expensive – we previously mentioned that using BNPL apps is a cheaper option compared to using credit cards. Well, this is true to an extent. Most apps offer interest-free payments for deferred payments of up 30 days or four installments every two weeks. Other apps offer consumers the option to purchase expensive items and pay over more extended periods, say up to 48 months. However, for these payment plans, interest rates of up to 30% are usually charged. This is much more expensive than using a credit card.
Risks to retailers
For retailers, there is more of an upside than a downside to integrating the later pay services. The only issue that can be considered a downside is:
Higher fees – consider this, the credit card companies such as Visa and MasterCard charge a processing fee of between 1.43% and 3.5% for every transaction. In comparison, BNPL services charge a transaction processing fee and a purchase value fee at the rate of 2-6%. In total, this could add up to as high as 8% for a transaction depending on the BNPL provider. This is expensive.
This is how the Buy Now Pay Later apps make money in addition to late fees and interest fees charged on long term loans to consumers.
Please note: After all, they are still loan products, and you should treat them as such to avoid financial pitfalls. When used diligently, some of these apps can help users build their credit scores and access higher ticker items cheaply.
10 Best Buy Now Pay Later Apps in 2021
The market for deferred payment apps is growing at exponential rates spurred in part by the COVID-19 pandemic. As more and more people have lost their livelihoods, these buy now pay later apps have become essential financial planning tools.
According to the Yahoo Finance report, these apps are expected to “grow 10-15x by 2025 to eventually process $650bn-$1tn in transactions.” This is based on survey data shared by the Bank of America.
Naturally, some of the leading financial players, such as PayPal, are not sitting around and watching other lesser-known brands overtake them. To take advantage of this growing popularity of the interest-free deferred payment solutions, PayPal has launched the ‘Pay in 4’ product.
Here’s the ten best Buy Now Pay Later apps that you should be considering while planning for your shopping activities in 2021.
Klarna Bank has its roots in Stockholm, Sweden. Founded in 2005 with the mission “to make paying as simple, safe, and above all, smooth as possible.” The company is now headquartered in Columbus, Ohio, with more than 90m customers and more than 200,000 retailers registered on the platform serving in 17 countries.
During its 15 years in operation, Klarna has attracted investments from Visa, Atomico, and Sequoia Capital and employed more than 3,500 employees.
How it works
Klarna offers its customers up to three payment plans: 4 interest-free installment payments every two weeks for six weeks, a one-off payment in 30 days (also interest-free), and a protracted long-term credit solution with payments lasting between 6 and 36 months. The last option will attract an interest rate of up to 29.99% on orders above $540.
How Klarna makes money
Klarna makes the bulk of its money by charging retailers to use the service. The fees include $0.30 set on every transaction processed and a variable purchase-value fee of up to 5.99%. It also charges a $30 monthly fee to merchants using its Instant Shopping solution.
In addition to fees charged to retailers, Klarna also charges customers late fees and interest on the long-term financing option. The interest-free payment plans attract a $7 late repayment fee, while the latter attracts a $35 fine for every month that goes unpaid.
Does Klarna affect my credit score?
This depends on your repayment plan. For the two interest-free plans, Klarna performs a soft check on your credit rating, which doesn’t impact your credit score. However, for the long-term financing option, Klarna does contact credit bureaus, and this will show up as an inquiry on your credit report.
Headquartered in San Francisco, Affirm was created in 2012 by PayPal co-founder Max Levchin. The company publicly listed its shares on NASDAQ in January 2021 under the ticker AFRM (Affirm Holdings Inc).
How it works
With Affirm, you get only one financing option, unlike Klarna. However, just like Klarna’s financing option, you will pay interest for credit solutions offered with Affirm.
Boasting over 6.5 million shoppers, Affirm allows them to choose their repayment plans within periods 3, 6, or 12 months. For large loans, repayment periods can be extended up to 48 months, while small loans can have equally short repayment periods of between 1 and 3 months without the option of extension. Interest rates vary according to credit records up to 30%. Credit limits vary from $50 to $17,500.
Does Affirm affect my credit score?
Yes! Late repayments or defaulting on your payments does negatively affect your credit score. Affirm uses your credit score, among other factors, such as repayment history, to determine your interest. Additionally, the company has differing credit arrangements with merchants allowing some to charge as little as 0% APR rates for deferred payments.
Due to the various partnership agreements, some customers might qualify for loans with some merchants and not others.
Quadpay has been around since 2017 and, in that time, has grown to become a significant player in the deferred payments niche. As the name suggests, Quadpay allows its users to split their payments into four equal installments, with the first installment made during checkout. The remaining three have to be paid within six weeks, two weeks apart.
How it works
To qualify to use Quadpay, one must fulfill four requirements: be a US citizen of majority age with a verifiable mobile number. Additionally, they will need to use their payment cards to make payments.
Anyone can signup for the service during checkout through their retail partners or on their website.
How does Quadpay make money?
There are two ways Quadpay earns revenue: by charging retail partners and late fees. When making payments, users will typically not be charged anything above the item’s price. For example, if the product costs $100, the payments will be split into $25 paid in four installments—no interest fees.
However, if the customer delays remitting payments, they will be liable to a late fee ranging between $5 and $10 depending on their residence state. This penalty can be waived if payment is made within ten days from the due date.
Does Quadpay affect my credit score?
Not at all. Quadpay does perform soft credit checks on all applications. However, this does not leave a credit check print. This means that late payments and defaults never affect customers. On the flip side, you can’t use Quadpay shopping to build your credit history, either.
4. PayPal’s ‘Pay in 4’
PayPal is a rather ubiquitous and popular payment option globally, and its foray into the short-term installment payment solutions niche is a big deal. Launched in August 2020, the ‘Pay in 4’ is PayPal’s answer to Klarna.
The definition of the product is in the title. PayPal allows its US customers to pay for products costing between $30 and $600 in four equal installments, with the first one made at the time of checkout. The other three are scheduled for payment two weeks apart for a total of six weeks.
How it works
PayPal is available as a payment option in millions of online stores, and this means that you can use the Pay later option at any retailer that supports PayPal.
Once you have chosen your items and are ready to checkout, choose the PayPal payment option, redirecting you to the checkout page. Here you can select the Pay Later option then proceed to make your first installment. PayPal will notify you about subsequent payments before they fall due.
The product is interest-free, but PayPal charges a late repayment fee on each installment.
Does PayPal’s ‘Pay in 4’ affect my credit score?
No, it does not. PayPal uses your account usage history and performing soft credit checks using external bureau data to assess each application. This is done seamlessly to ensure minimal delay when checking out.
Sezzle is based in Minneapolis, US serving more than 2 million customers in the US and Canada. Founded in 2016, Sezzle has also grown to become a staple solution for people seeking deferred payment loans.
Over 25,000 participating merchants on the Sezzle platform give shoppers variety to choose their favorite retailer.
How it works
Similar to PayPal’s ‘Pay in 4’ solution, Sezzle offers a four-installment payment plan. The first installment is due upon checkout, with the other three even spread out two weeks apart.
The payment is interest-free, so no extra charges on the cost of items. However, the app charges a $10 late repayment fine and a $5 rescheduling fee.
Not many apps on this list offer users the option to reschedule their payments. Therefore, if you need a more flexible loan app, Sezzle might be a great option.
Does Sezzle affect my credit score?
Sezzle does not perform hard credit report checks, which means that your activity on the app does not affect your credit score.
Afterpay was founded in Australia in 2015 by Nick Molnar and Anthony Eisen. In the last six years, the FinTech company has attracted more than 11 million users based in North America, the UK, Australia, and New Zealand. In the UK, Afterpay offers its services through its subsidiary Clearpay Finance.
How it works
Payments on Afterpay are processed in six weeks, with the first installment due upon checkout. Similar to other services on this list, Afterpay also offers interest-free ‘pay-later’ loans.
The company makes its money from charging merchants as well as late repayment fees. In the United States, the late fines are capped at 25% of the order value. This means that a shopper will not be charged more than 25% of the order value in penalties.
Users have several options for using Afterpay. There’s an app that integrates all the supported retailers and allows users to browse their favorite merchants all in one place. They can also use the retailer’s website or app and checkout using Afterpay. The last option is to use the Afterpay Card both online or in-store.
Does Afterpay affect my Credit Score?
No, it does not. Activity on the platform is not subject to credit reference reporting, and therefore any late payments only accrue fines, not negative credit scores.
According to the service, new users start with lower spending limits. Users can then increase their limits by using the app frequently and paying their loans on time.
Perpay was launched in 2014, and contrary to how most of the apps on this list work, Perpay is more of a modern-day solution to payday loans. You could consider it old-fashioned, but it does offer a similar service to the rest of the apps on this list.
The service uses your pay stub to assess your loan limit. However, it is good to know that your credit score rarely affects your loan limit as long as you are employed with a stable paycheck.
How it works
Perpay allows new users to submit their information through a form. However, if the provided information is not enough to accurately assess a user’s spending limit, a pay stub may be requested instead.
Once the spending limit has been ascertained – between $500 and $2,500 – a user can start shopping on the partner retail stores on the Perpay Marketplace.
Items added to the cart are submitted for approval. Once approved, instructions on payment are sent via email. Usually, this will entail instructions on how to make payment using a direct payroll deposit.
Shipping is only done after the first installment has been made, typically on your next payday. Payments on Perpay are made in 8 monthly installments instead of the more popular four bi-weekly installments.
Late payments are charged a $35 fine.
Does Perpay affect my credit score?
Perpay does not use your credit score to determine spending limits, and neither does it submit your payment history to the credit bureaus. Instead, it uses updated information from your recent pay stubs.
Zebit works similarly to Perpay and offers customers a Zebitline credit line based on their salary prospects up to a limit of $2,500. According to a launch press release published in 2015, the company was created to provide zero-interest credit to 68 million Americans with little to no access to traditional credit.
Zebit has pre-arranged agreements with employers to avail payroll information of their employees to assess each employee’s creditworthiness.
Using this information, Zebit can work around the need to pull up FICO credit scores.
How it works
Consider Zebit a membership marketplace. The company sources wholesale items from sellers and sells them at retail price to Zebit account holders with available Zebitline credit.
There are various item categories to choose from, including electronics, furniture, appliances, fashion, beauty products, etc.
To access the marketplace, open an account with Zebit and submit your information through a form. In the form, you will provide your employment details, including a social security number. Zebit uses this information to pull up soft credit records for verification purposes.
After choosing an item of purchase, you can then checkout and make a down payment equal to 25% of the item’s value. You can do this using a credit card. If the down payment is not made, the shipping is held until the full down payment is made.
Subsequent payments will be processed over the next six months through biweekly or monthly installments. The installments are interest-free, i.e., 0% APR.
Does Zebit affect my Credit Score?
No, it does not. It does, however, pull soft credit checks that don’t affect your credit record. If payment defaults, Zebit the services of collections agencies and rescind the account’s available credit limit.
ViaBill is a conventional pay later services provider. Users can buy their items, place a 25% down payment, and then make three equal monthly installments after that.
How it works
Like most Buy Now Pay Later apps, ViaBill also offers interest-free repayments meaning that the product’s price at checkout will be the only amount you have to pay.
However, it is worth noting that if monthly payments are missed, the company charges late fees of up to $15.
This is one of the ways ViaBill makes money. Additionally, it charges retailers a $30¢ fee per transaction on top of a 2.90% purchase value fee.
To use the service, head on over to their supported stores’ websites, shop, and checkout using ViaBill. The company will deduct the down payment from your linked debit card or bank account. Application approvals are done instantaneously during checkout.
Does ViaBill affect my Credit Score?
No, it does not. ViaBill pulls soft credit checks for verification purposes, and this does not affect your credit score.
Splitit makes shopping seamless and effortless. No applications, no fees, nothing. With Splitit, you get to use your credit or debit cards to shop and make regular payments interest free. It’s that simple.
How it works
Create an account with Splitit and connect your card. Once you have successfully created an account, you will be able to shop on Splitit supported merchant websites and checkout using the Splitit option.
The payment plan allows shoppers to make their first deposit during checkout, and the remaining balances are split equally and paid monthly.
Debit card purchases are limited to $400 spend limits. Therefore, buying items above that limit will require using a credit card. Additionally, some merchants may decline the use of debit cards.
Since there are no fees charged to customers, Splitit makes 100% of its money by charging the merchants. The merchants can opt to receive their money all at once during the customer checkout or receive it periodically as the customer makes installments. The latter option will cost a variable fee starting from 1.5% of the order value + $1.50 per installment. The former will be charged a one-off fee of 3% of the transaction value.
Does Splitit affect my Credit Score?
No, it does not. Splitit has a simple application process that avoids credit checks because the money used is the customer’s money.
There you have it. The ten best Buy Now Pay Later apps will help you better manage your finances, especially during these challenging times.
The apps offering the BNPL business model enable their users to make instant purchases but arrange to make the payments slowly, usually within six weeks. This period could be extended, depending on the app.
You also learned how to use the apps, which ones affect your credit score, and which ones do not.
If you need to use one of these apps, choose one or two and stick with them. Avoid using several apps simultaneously since managing payments across many apps can quickly become overwhelming. Happy shopping!