Buy Now Pay Later: Alternative Payment Method 101
For the past few years, the amount of outstanding debt racked-up on credit cards accruing interest has been falling, as debit cards and Buy Now Pay Later platforms appeared set to take over as consumers’ preferred payment methods. So, what are the Buy Now Pay Later platforms in Australia and what do you need to consider before signing up?
What is Buy Now Pay Later?
Buy Now Pay Later services allow users to purchase a product or service at a shop or online and pay it back in interest free instalments – not too dissimilar from traditional ‘lay-by’ services, in which you pay for goods in two or three instalments, and do not receive the goods until the full price has been paid.
The difference between Buy Now Pay Later and lay-by is that consumers who use Buy Now Pay Later services receive their items instantly and then make repayments to the Buy Now Pay Later service provider, not the store that the goods are purchased from.
How does Buy Now Pay Later work?
When you sign up to a Buy Now Pay Later company, consumers are approved and allocated an account limit. Users can either link a debit or credit card to their account and use the app to manage and/or make repayments.
To use Buy Now Pay Later services at the checkout, all consumers need to do is select Buy Now Pay Later as their payment method. If they’re shopping online, users may be redirected to their service providers website to complete the purchase. And if they’re choosing to use it in-store, users may need to make their purchase via a purchase code on the company’s app.
Given that many Buy Now Pay Later service providers offer fee and interest free terms, you may be wondering how they turn a profit from the late payment fees alone? To offer these conditions to the end consumer, Buy Now Pay Later service providers interestingly make 85% of their revenue from merchant fees.
We’ve compiled a list of pros and cons you may want to reflect on before signing up to any Buy Now Pay Later services:
Pros
- Can be a good alternative to using a credit card
- The Buy Now Pay Later structure offers an automatic framework for payments, facilitating steady cash flow
- Service providers offer free and interest free terms
- Buy Now Pay Later services are accessible, easy to use and offer fast user approval
- Service providers offer seamless integration within stores (both online and offline)
Cons
- Can influence your shopping habits by encouraging impulse spending
- Added cost of late payment and other ‘hidden’ fees (see more below)
- Fixed repayment schedule means users have no choice when payments are made
- Late repayments can impact your personal credit rating – this affects your ability to borrow money in the future
If you’re considering signing up for Buy Now Pay Later services, it’s also important to review the regulations – because Buy Now Pay Later services charge fees instead if interest, they currently aren’t regulated by the NCC like credit cards, mortgages, and personal loans. The Australian government did however announce in December that it was looking to update financial laws to regulate a range of emerging technologies, which included Buy Now Pay Later services.
Compare the fees charged
Buy Now Pay Later services are often advertised as ‘interest free’ or ‘0% interest’ however they do charge other fees that can quickly add up:
- Late fees; incurred if you miss a payment or pay late – between $5 to $15 per payment
- Monthly account-keeping fees; a fixed monthly fee – up to $8 per month
- Payment processing fees; some service providers charge an extra fee each time you make a payment – approximately $3 per payment
- Establishment fees; a fee to set up the account – up to $90 per account
For a comprehensive comparison of the fees charged by different providers, we recommend viewing the fact sheet on the Australian Finance Industry (AFIA) website.
In addition to the service provider fees, you may also have to pay bank fees:
- Overdrawn fees; incurred when you don’t have enough money in your account to cover the repayment
- Interest; if you your Buy Now Pay Later account is linked to a credit card
It comes down to financial discipline
Like any financial product, deciding whether or not to use Buy Now Pay Later services is a personal choice based on your financial situation and spending habits.
If you use Buy Now Pay Later services to spend as you would normally, it can be a good way to manage your finances by spreading out payments over a few weeks – especially if you receive a monthly salary for example.
On the other hand, if you’re inclined to increase your spending habits with this service at your disposal, you could have difficulty making repayments and damage your financial position.
Whilst signing up for Buy Now Pay Later services is your personal choice, it does raise the need to review your goals, and define and reprioritise the important things in your life. If things have changed since we spoke last and you’d like to review your cash flow or need assistance with the application of your financial resources, please reach out to your adviser for personalised assistance.