Open banking: shining light on the dark side of Buy Now, Pay Later (BNPL)

Times are hard, and they are probably bound to get harder before it all goes back to normal. The worldwide economy is suffering severe setbacks all through 2022, but financial hardships are not a recent concern. 

People have been experiencing above-average financial issues at least since 2020, when a global pandemic broke loose and caught almost 8 billion people off guard. But people are resilient, and always find ways to cope. 

You have probably already read something about BNPL, an acronym that stands for Buy Now, Pay Later. This type of point-of-sale loan has seen immense growth since 2020, which makes a lot of sense if we think about what BNPL is.

What is BNPL?

Simply put, Buy Now, Pay Later is a way of buying a product and delaying its payment. It’s a short-term financing tool that allows us to pay off purchases over a predetermined period of time, depending on the amount of the purchase. 

Most times BNPL is interest-free, but users are charged an upfront payment and fees (payment processing fees, late fees, establishment fees, etc). Nevertheless, this payment option is becoming ever so popular, especially when shopping online. Why? Easy, because they are more likely to be approved than a traditional credit card payment or credit line, and you can access it in seconds, spreading the cost of your purchases. 

How does Buy Now Pay Later work?

First thing we have to know is that not all BNPL programs are the same. Be mindful of each company’s terms and conditions, as they can vary when it comes to fees and other technicalities. 

There is, however, a general way of operating when it comes to Buy Now, Pay Later programs:

1. The user buys something at a participating merchant, opting for BNPL at checkout;

2. Approval happens in seconds, the user makes a down payment (the amount can vary depending on the product and company);

3. The user pays for the rest in a set number of instalments (biweekly, monthly, quarterly, etc.) without interest;

4. Payments are automatically subtracted from debit card, bank account or credit card. Checks or bank transfers are also viable sometimes;

Usually, Buy Now Pay Later companies perform what is commonly known as a soft credit check for approval — a more superficial evaluation of certain information on your credit report. If the applicant meets all the necessary criteria for BNPL, a full examination of one’s credit history is usually not necessary and the application is approved. 

The main advantages of this practice, besides allowing for fast decision-making, is that a soft credit check facilitates access and does not affect the user’s credit score. 

However, some BNPL providers may choose to perform a full examination of the user’s credit history, especially when they offer extended instalment options. If so, that may temporarily impact the overall score. It’s always worth reading the fine print and being aware of the terms and conditions of your provider.

The dark side of Buy Now, Pay Later

The appeal of Buy Now Pay Later payments is easy enough to understand. You delay the payment, benefit from instalments, and there is no interest associated. BNPL is available even if other options aren't due to a low credit score. You might think, “what's not to like?”

Well, nothing in life comes for free. Easy access can have you abusing BNPL options, increasing spending and the risk of over borrowing. Obviously, missing a payment, or even being late, might carry heavy fees that can further increase the price of a product. 

Failing to pay in time can also be the fastest way to damage your credit score, even if your provider opted for a soft credit check for approval. How? Missing or late payments can have your account sent to collections, and debt collectors can report faulty behaviour to credit bureaus. And the later you are on payments, the more it can affect your credit score. 

Moreover, if you prefer using BNPL to traditional credit card payments, you are missing out on benefits like cashback or reward points.

Perhaps it’s safe to say, then, that the darkest side of Buy Now Pay Later really is how hard it can be for users to track payments, and how easy it is to engage in debt if you’re not careful.

The influencer generation

BNPL is perhaps more attractive to younger people, who are now more than ever leaning into buying online. 

Services that fit the point-of-sale loans category are now under the influence of convoluted marketing campaigns, some of them coming from internet influencers and brands whose business models heavily rely on platforms like Instagram or TikTok. 

Who hasn’t seen those videos about ‘hauls’ from popular designer companies? They are a fantastic vehicle to display the latest and greatest from fashionable brands, but they can also make people, especially young people, feel compelled to sport the latest trends, no matter what. 

What no one tells you, but you should figure out by yourself, is that BNPL payments can accumulate very fast. It can be hard to keep track of payments, especially when there are many of them, and from several providers.

Some argue that these short-term credit programs encourage you to spend way above your means, because payments are fragmented and seem easy to manage. But some think that BNPL exists to make our lives easier, and it’s up to each person to take control of their finances and avoid getting into negative spirals.

Fortunately, there are now several instruments that put financial literacy at the forefront of their offerings. This is where open banking comes in.

Open banking and BNPL: for in darkness, there is light

Despite all the possible risks of BNPL, there is no denying that it can be a precious tool to help people with budgeting, or even cope with difficult times. 

High acceptance rates, especially from Gen Z and Millennials, make these arrangements a must-have for online retailers. 

Let’s not forget, BNPL is still a form of credit, so it performs soft credit checks on users before issuing an approval. This form of assessment is far from comprehensive, which can lead to mistakes on whether someone can afford a purchase. 

By seizing what open banking has to offer, BNPL providers can definitely improve their decision-making process, while at the same time improving customer experience. 

Open banking data provides the right information and insights to perform accurate and almost instant assessments, reducing risk and friction. Everyone wins — decisions get faster, risk assessments are more precise, and both customers and businesses know what they can count on. 

A precise evaluation of one’s current financial situation and respective habits not only increases approval rates, but also serves as a baseline to the development of tailored products and services that fit each customer’s needs. 

This is why BNPL providers should take on open banking to come up with the right tools to help customers keep track of their Buy Now, Pay Later commitments. Those products could potentially aggregate data that allows users to have a broader understanding of their obligations, and also sport features like reminders on instalment payments.

There is no reason to stigmatise a product, especially when it can be very beneficial to a lot of people. We, as consumers, should be the masters of our own finances, and open banking can certainly help us gain control over our money and our decisions.