Convenience and speed are two of the most important things in our fast-paced world today. With a single click, we can order groceries, book a holiday or even buy a car. In this ever-evolving landscape, a new breed of financial technology (fintech) apps have emerged, promising to make shopping even easier — ‘buy now, pay later’ (BNPL) apps and services.
But despite the allure of immediate ownership with the promise of future payment, these apps carry significant risks that consumers need to be aware of.
BNPL apps have seen tremendous growth in recent years. They offer consumers the ability to purchase items immediately and pay for them over time, typically without interest if paid within a specific timeframe. It’s an appealing proposition, especially for millennials and Gen Z consumers who are wary of credit cards and traditional loans.
However, there’s a worrying side to this story. Behind the slick user interface and playful marketing, these apps can lure consumers into a cycle of debt that they might not fully understand.
How buy now, pay later services attract consumers
The primary appeal of BNPL apps is the ability to satisfy our desire for instant gratification. We want what we want, and we want it now. These apps tap into this impulse, enabling us to buy something today and worry about the cost later. But this convenience can come with a hefty price tag.
When we defer payment, it’s easy to lose track of how much we’re spending. A few small purchases can quickly add up, leading to larger than expected payments down the line. And for those who miss a payment, hefty late fees can kick in, pushing consumers further into debt.
Another danger lies in the way these apps create an illusion of affordability. By breaking down a purchase into smaller, seemingly manageable payments, they make expensive items appear within reach.
For example, a Php50,000 smartphone might seem prohibitively expensive. But break it down into five payments of around Php10,000 each, and suddenly it feels more affordable. However, the reality is that if you can’t afford the Php50,000 upfront, you likely can’t afford the five Php10,000 payments either. It’s a psychological trick that can lead to overspending and unnecessary debt.
BNPL apps are especially popular among younger consumers, a demographic that is often influenced by trends and peer pressure. In addition, younger people often lack financial literacy. Seeing friends and influencers flaunting their latest purchases on social media can ignite a desire to keep up, and BNPL services provide an easy way to do so without feeling the immediate financial pinch. However, this can lead to a spiral of debt and the constant need to maintain appearances, further exacerbating financial instability.
From the retailer’s perspective, BNPL apps may seem like a win-win situation: they encourage more sales and promise to handle all associated risks. However, retailers could end up paying a high price for this convenience. These apps charge retailers a percentage of each sale, which can eat into their profit margins. Moreover, endorsing such services could potentially harm the retailer’s reputation if consumers eventually end up in financial trouble.
Even though buy now, pay later schemes can potentially be harmful for some people, there’s no doubt that plenty of consumers also benefit from it. Purchasing essentials in installment options can be of great help, especially with the recent global health crisis. Many students who suddenly need their own laptops because of online classes were able to afford one, and continue schooling with the help of these BNPL apps.
Like most things in life, it can be good if used in moderation and with caution.
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Risks and consequences of buy now, pay later apps
While BNPL apps often tout “no interest” or low interest as a selling point, many hide substantial fees in their terms of service. Late payments can incur hefty charges, and some services even have monthly account keeping fees. These hidden costs can quickly turn a seemingly affordable payment plan into an expensive proposition. While older Filipinos are often wary of predatory loans because of their ‘horror’ stories with credit cards, the younger generation is mostly unaware of it.
Many BNPL apps and services disguise themselves as a technology company (like WeWork), enabling them to lure investors and raise capital at a much higher valuation. With plenty of funds at its disposal, these companies managed to offer lower interest rates compared to other conventional loan options. This allowed them to attract more customers and at a faster pace. Once they have a larger customer base and a significant portion of the market share, they will gradually increase the interest rates and fees, similar to the business strategy of the likes of Uber, Grab, and other tech giants.
Perhaps the most concerning aspect of BNPL apps is their lack of regulation. Despite functioning much like credit cards, these services aren’t subject to the same regulatory scrutiny. They don’t have to conduct credit checks or clearly disclose their terms and conditions. This lack of transparency can make it hard for consumers to understand what they’re signing up for, leading to unpleasant surprises later on.
Although most BNPL services don’t check your credit score before approving your purchase, they can still impact your credit history. Some apps report missed payments to credit bureaus, which can lead to a lower credit score. This could affect your ability to secure loans or mortgages in the future. In other words, that impulse purchase today could cost you so much more down the line.
Given the risks and growing popularity of BNPL, there’s a clear need for greater oversight. Regulatory bodies must step in to ensure these services are transparent about their fees and the potential impact on users’ financial health. Consumer protection laws should be revised to cover these new types of financial services, ensuring that users are protected from predatory practices.
The rise of BNPL services highlights the need for greater financial literacy. Many consumers don’t fully understand the implications of these services, including the potential impact on their credit score and long-term financial health. It’s crucial to educate ourselves and make informed decisions, rather than being seduced by the promise of instant gratification.
While BNPL apps offer a convenient alternative to traditional credit sources, they also pose significant risks. Their appeal lies in their ability to tap into our inner desires and create an illusion of affordability. Yet, this convenience can lead to overspending, unexpected debt, and financial hardship.
To protect consumers and promote financial health, it’s essential that we advocate for stricter regulation of BNPL services. This includes mandatory credit checks, clear disclosure of all fees and charges, and caps on late payment penalties. Additionally, these companies should be required to promote financial literacy as part of their business model, helping consumers understand the implications of their purchasing decisions.
As consumers, we must approach these apps with caution, understanding their risks, and making responsible financial decisions. It’s essential to remember that when it comes to financial health, there are no shortcuts. True financial freedom comes from disciplined saving, prudent spending, and wise investing — not from an app that encourages us to buy now and worry about the cost later.