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Pay More, Pay Later

FinTech, it is widely acknowledged, is a force for good. Harnessing technology, it can improve services, empower competition, extend inclusion, combat fraud and much, much more besides. But the biggest promise routinely made by fintech champions is that of reducing cost – and nowhere do we hear that claim more than in the payments area.


It is perhaps odd then that the payments tech du jour is Buy Now Pay Later. ‘BNPL’ may well be ramping up competition and reducing costs for those shoppers that like to pay later, but it also risks baking in higher payment charges for everyone else. Bear with us.


High profile purveyors of BNPL partner with merchants to offer shoppers the ability to pay their purchase in instalments, at no extra cost. There is of course no free lunch, so we have to ask who pays for the (albeit currently cheap) funding and the risk of default? That would be the merchants.


To offer consumers these buy now pay later options, merchants can be faced with set-up fees, monthly or quarterly charges and commission fees (on each transaction). Credit and debit card payments were never free, but their interchange fees can pale in comparison to the costs a merchant faces offering BNPL products. And that’s because while with traditional credit card-based lending, the consumer pays to borrow, with BNPL, the merchant does.


The fast take up of BNPL by consumers and merchants has been evenly matched by the soaring valuations of existing BNPL providers and an onslaught of new entrants. This week alone Monzo, Curve and Goldman Sachs all piled into the market. The economics are compelling, because the set-up, monthly and commission fees stack up nicely – especially when topped up by the late payment charges levied on consumers.


But it’s not just investors and would be unicorns that keep an eye on payment charges. Merchants do too, not least because they have to bake them into their pricing. In regions (like the EU and UK) where merchants are unable to impose payment surcharges, that means that irrespective of whether we pay by debit card or in three instalments, we are paying the same price. Even in geographies that don’t have restrictions on surcharging, merchants may be unwilling or unable to offer differentiated pricing – either because the mechanics are too painful, or because they don’t want to offput potential BNPL customers.


As BNPL becomes more and more ubiquitous, even the thrifty Buy Now, Pay Now sorts will do well to rethink their prudence. After all, where they’re already going to be paying for the pleasure of paying later, they may as well enjoy it. Now it’s true that with interest rates at or near zero, those frugal types would find minimal enjoyment from doing so, but what about when rates rise?


Indeed, what will happen when rates rise? They could always be dropped, but more likely the zero per cent offers will start to eat into the providers’ bottom lines and/or the merchants will be charged more. Either way, the enjoyment the rest of us will get from buying now, paying later will increase because we’ll be earning more on our balances in the interim. That will presumably drive more of us to BNPL and more merchants to offer it. All of which, contrary to the aforementioned cost-lowering boasts – and all else being equal – will result in (this part of) FinTech driving up the cost of payments.


FinTechs are nothing if not inventive of course, and rules and regulations can be changed; but it’s still worth thinking about – absent any change in the current trajectory, widespread merchant adoption of BNPL would mean we could all soon be paying more to pay.


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