What Is “Buy Now Pay Later” and How Does it Work?

But if the user does not get charged interest, how do these companies make money?

Simply put, these services make money with their late payment fees, and often charge a fee to the merchant for each transaction. One major reason why some people dislike BNPL services is because of their late payment fees. Some companies charge exorbitant fees to the user if there is a missed payment, which sometimes reaches up to 25% of the price.

Americains’ credit card usage is rising more and more every year. Multiple credit card companies are starting to offer BNPL plans with their credit cards in order to stay aggressive in their field. Another reason BNPL spending is rising is because the stigma around the service is shifting. Before, these services were primarily used for expensive purchases, but now they are used for common payments like clothes or food. These services are also spiking in the younger generations, primarily Gen Z and Millennials, although both credit cards and BNPL plans enforce the user to be at least 18 years old. BigCommerce.come states that “the growth of BNPL among the younger generations points to a future where BNPL no longer exists as an alternative payment method but the primary one.”

One major reason why BNPL services are growing so much is because while credit cards seem like a looming thing to take on, many people believe these payment services are easy to get approved for and less ​​enigmatic. The services also allow people to buy items they want immediately, without having to pay the full amount at the time of the purchase. Inflation can also be seen as a reason for the rising usage. As things get expensive, they are harder for people to afford and payment services like this can help people budget these purchases better.

There are downsides to this though, with BNPL, people are more likely to buy things that are out of their budget just because the monthly amount seems more affordable. They are buying items that they would stay away from had they needed to pay for it in one lump sum. Another con is that the user is not building their credit score (although some BNPL services do report information to credit bureaus), earning airline miles, cashback, or points that they would otherwise earn if they used their credit cards.

Overall, while taking on any credit, it is important to know what you're getting yourself into, and even more important to do your own research. Buy now pay later tools can be useful, but they can also be risky if fees pile up. I think these services will be very interesting to watch over the next few years, and I'm very curious if they will grow exponentially in popularity.