What is Buy Now, Pay Later (BNPL)?

Financing something you are buying at a merchant or shop is not a new concept. For decades people are using this type of financing during a vehicle purchase, a home purchase, etc. For example, when you go to buy a car at a car dealership, someone at the dealership will ask you whether you would like you car to be financed right at the dealership. In this process, you will be asked provide some information and the dealer will run it by many banks/lenders. If approved, you will be able to take advantage of the financing right at the dealership. The industry term for this type of financing is Point of Sale (POS) financing.

Of course, the POS financing is not just limited to car buying but it is also offered when you are buying large ticket items like appliances or replacing the HVAC unit in the house. The POS financing space is constantly evolving and covers a wide variety of items that you can finance at the merchant (Point of Sale). Not surprising, in the last few years the evolution of POS financing has picked up and expanded with more and more tech start-ups are getting into this space.

These tech start-ups are also pushing the boundaries of POS financing. Originally, people went with POS financing to finance expensive items like cars, etc. But in recent years, these tech start-ups are offering financing on pretty much everything regardless of the price of the item. For e.g., one could finance a pair of $40 jeans into a 4 installment loan. A large number of these items are financed with short-term installment loans (e.g. 4 payments in payable at every two weeks) but other longer terms installments options are also available. Collectively this type of POS financing is referred to as Buy Now, Pay Later (BNPL) financing option.

The BNPL option is not only different in the type and size of items covered, but many BPNL lenders are very well integrated into the merchants’ purchase journey. These lenders are singing up partnership deals directly with merchants and integrate their application into the check-out step of the purchase. Majority of BNPL lenders use non-traditional method of underwriting, so they are able to approve many more customers than the traditional lenders. The seamless integration at the checkout, simple application process, and higher level of approval has been fueling the growth of these type of loans.

Some Notable Players

Affirm, a tech startup by a former PayPal executive is one of the biggest players in this space. Other well-known lenders are Klarna, Afterpay, Quadpay, Sezzle, Splitit. Space is getting crowded as more and more tech start-ups are jumping into this space. Many of the lenders started outside the US and now they are rapidly expanding into the US market. Recently, Pay Pal has announced that they are also going to offer a short-term installment option.