The Buy Now, Pay Later (BNPL) model has arrived in Taiwan. Foreign businesses such as Singapore’s Atome and NP Taiwan, which recently launched AFTEE BNPL, all regard Taiwan as a nascent but growing market.  By observing the process of BNPL development in Europe and the US, what changes will we encounter? What should we pay attention to in the future?

Low credit limits, easy application

BNPL frequently uses payment installments, with notifications by text message or e-mail. Customers should understand when the payments start, whether there is any interest, any penalties for late payment, and whether the transaction is connected to their credit record. Barclay's survey of UK consumers last year found that 36% did not understand the consequences of not paying on time, 36% admit that using BNPL makes them spend more money, and 35% will use BNPL tools more frequently as the cost of living increases. More than half (52%) did not know that BNPL operators do not need to check the user’s finances. Klarna, a large BNPL firm in Europe, transfers overdue payments to debt companies, which ultimately affects personal credit.

The acceptance criteria for BNPL are easy, and the application is convenient. Unlike credit cards or loans, it does not require strict credit background checks. The interest and late payment penalties, and whether final overdue payments will be cancelled or may impact official credit histories, varies from company to company. The main difference with credit cards is the ease of application with a low credit limit, but BNPL does not contribute to formal credit records. Many foreign operators also provide small loans. Based on payment records, users can apply for a loan after a normal repayment period. BNPL companies have built a small credit ecosystem by themselves, making it easier for users to obtain credit.

Many users believe that linking the installment payment to a credit card or automatic bank payment can reduce the burden of monthly expenses. In many countries, BNPL is used together with credit cards, so as to prevent more recurring interest. Credit card fees could affect credit if they become too large to pay off. For those without a credit card, BNPL adds payment options to enjoy the convenience of zero-interest instalments. Zip, an Australian BNPL company which also operates in the United States, has launched a virtual credit card, called Zip Card. At first, the limit is NT$ 30,000. Installments are arranged automatically when the user swipes the card. They can link their bank accounts or debit cards for payment, so that those without credit can also enjoy the convenience of pre-payment without needing a credit card.

Debt abyss

However, the convenience of BNPL also brings challenges to personal finance. According to Citizens Advice in the UK and Reuters last year, 40% of UK users have difficulty in paying for BNPL purchases. One in three US users can't keep up with the repayments. These tools bring challenges to consumers with less self-control. Consumers tend to use BNPL to buy clothes, jewelry or holiday gifts – items that are already prone to over-consumption. Without the pressure of paying all at once, it becomes easier to break the bank. If you accidentally exceed the upper limit of your budget, you could unknowingly push yourself into a debt trap. BNPL can be used as a financial budgeting tool, but we should also not ignore that is fundamentally a type of loan. The experiences of Europe and America show that even with a BNPL tool, customers should only buy things they need and can afford.

After the pandemic, performance of the e-commerce economy has reached a new high, and more and more needs can be met through online shopping. Service models have also been evolving. In addition to BNPL, some companies now have a “try before you buy” option. For example, in Amazon's clothing area, many stores let customers order eight items at a time without paying immediately. After a 7-day trial, users can decide which items to buy, and return the rest. The checkout method can also include credit cards or BNPL installments. In the US market, Samsung mobile phones mainly use try before you buy, which is directly combined with BNPL. After purchasing a new phone, there is a 21-day trial period. If you finally decide to buy, the bill is automatically scheduled with Affirm BNPL and paid in four installments.

VISA and MasterCard joining the fray

European and American consumers often use BNPL for large items at first. After a few uses, though, items of $10,000 will be divided into four installments. As this consumption pattern gradually becomes a habit, items of $100 are also be divided into four installments of $25. As long as you pay a part of the purchase price, you can own the product. This model also contains the concept of experience: one can experience the product first by paying a small amount, and then decide whether to pay for it completely. Consumption trends will also cause more and more merchants to include an BNPL option.

Many online stores in the US have found that their performance has improved significantly after the introduction of the BNPL payment model. It is very popular with young consumers. Without BNPL, merchants will lose some customers who prefer it to other payment options. BNPL increases the average purchase amount per consumer. In Europe and the US, a BNPL option is now often a necessity.

MasterCard is expected to enter the BNPL market this year. In addition its own platform, it will also provide services in conjunction with several existing larger BNPL players to develop a wider customer base. Its service model may be different. Operators will provide pre-approval or instant approval at checkout through consumers’ apps, allowing them to use online or brick-and-mortar stores. Consumers can also provide bank account information to increase their chances of approval. VISA is expected to join the BNPL battle with a virtual card this year. After it joins the BNPL market, its purchase records will be increasingly be integrated with those of banks. In the future, all purchases may become part of one’s credit record. It will be worth watching whether the current BNPL operators are eventually replaced, or whether they can continue serving those without credit. In any case, BNPL has become a global trend, and market forecasts show continued expansion until 2028.

Norms to avoid impulse spending

In late February, the Wall Street Journal reported that Equifax, a US credit agency, is expected to begin recording consumer BNPL information, which will affect official credit reports and loan terms. The upside is that paying on time also builds credit, increasing credit scores and enabling consumers to apply for other credit products, such as credit cards and loans. On the other hand, delinquent payments can also become part of consumers’ credit history. Last year, BNPL sales in the US market reached US$ 5.5 billion, and it is expected to continue to expand. At this scale, formal credit institutions are unable to ignore the market. The Wall Street Journal also mentioned that the recommended limit for BNPL purchases is three if you do not want it to affect your future credit.

In order to protect consumers from taking on more debt than they can afford on BNPL, the US Consumer Protection Bureau (CFPB) has also begun to push the government to establish relevant regulations, hoping that in the future, operators will be required to measure consumption before providing this service, just like other credit products, to prevent users from taking on debts beyond their repayment ability due to impulse spending.

Young European and American consumers are often confused about tools like credit cards, and now BNPL. The most common misunderstandings are that credit card interest is high, but you can use BNPL with peace of mind; or that credit cards penalize users for delaying payment, but BNPL does not. The current standard of judgment between BNPL providers may be to rely on peers, a favorite or frequently used store, which company uses BNPL products first, or even an intuitive app interface that is easier to understand and use than a credit card, causing users to think that BNPL is a friendlier payment model than a credit card. As new financial products become prevalent, more financial education is needed to help consumers understand how to use them. Issuers need more complete explanations, and users must also understand the terms of the product, so that BNPL tools can be used it with confidence.

The author of this article is a project researcher at TABF.