Buy Now Pay Later


The Covid-19 pandemic has exerted unforeseen, yet not surprising influences on the digital innovation market. As close quarter interaction faced prohibitions, consumers were left with additional disposable income, some of which invariably found its way to e-commerce websites. Considering this, fintechs moved quickly to make this an even more attractive proposition for consumers – a Buy Now, Pay Later option (BNPL). Theoretically, BNPL is not a new concept at all.

So how does this work?

In many industries the concept of deferred payments has an impressive track record. Real estate, where you can live in a house for a few years before your first instalment goes through, is one example; student loans are another.

In a BNPL model, a BNPL service provider contracts with a merchant to fulfil a payment on behalf of a consumer to them within a stipulated time. The customer, then pays back the paid amount to the BNPL service provider, typically in deferred tranches.

Across business models, the BNPL’s most common revenue source is the merchant itself, and not the customer. The merchant may pay the BNPL a percentage per transaction, a fixed fee per transaction, or a periodic marketing/ advertising fee. Further, there may be additional backend arrangements where the BNPL service provider pay a reduced amount to the merchant than the actual price of the product, which the customer pays them, and the difference if the BNPL service provider’s source of income.

But what’s in it for the merchants? The idea is simple – a BNPL plug in increases the attractiveness of the merchant’s offering for the customer as compared to another e-commerce platform where this option is not available. This avenue is particularly attractive for consumers who do not own a credit card.

Some fees are levied from the customer as well. These kick in primarily in the form of a late fee, and not interest. For instance, if a customer agrees to make his full payment to the BNPL service provider within a stipulated time, but is unable to meet that commitment, a fixed, pre-disclosed late fee may be levied. However, late fees are usually capped, typically not more than25% of the value of the product/ service purchased.

How is this not a credit card?

Some of the readers’ minds may jump straight to a credit card when they hear the term BNPL. This comparison may not be accurate, since a credit card involves a completely different set of procedures and actors working together in the backend. Resultantly, the entire endeavour is much more complex demanding a higher level of regulation. This is not true for BNPL, which, as explained above, is a straightforward arrangement between the BNPL service provider, the merchant, and the customer. Some commentators have likened BNPL to a cash on delivery model, which is also essentially a deferred payment option.

Further, unlike a credit card, the revenue for a BNPL service is not earned from interest and other fees charged by credit card companies. Instead, the BNPL’s revenue represents the value added for merchants who can now reach out to a larger audience. Therefore, some have argued that the fees paid to BNPL service providers may be thought of as marketing/ advertising fee than a credit facility.

Market statistics

The market statistics for BNPL are impressive. Consumer spends through BNPL grew from USD 24 billion in 2020 to nearly USD 100 billion in 2021. According to a Worldpay report, in 2020, pay later accounted for 2.1% of ecommerce transactions worldwide, continuing to earn market share, and expecting to double by 2024. According to the Bank of America, the market for these apps is likely to grow 10-15 times by 2025 to eventually process between USD 650 billion and USD 1 trillion in transactions. The investments into the sector back this enthusiasm. Australia’s second biggest BNPL player Zip purchased the rest of the shares in Spotii (a UAE BNPL service provider) it did not already own for USD 16 million. Further, Tabby, a local competitor of Spotii raised over USD 30 million including funding from Abu Dhabi state fund Mubadala. These are just two of the many examples.

As with every new fintech offering, there are veritable concerns around the feasibility, safety, and longevity of this model. Additionally, there are concerns around customer safety, default risks, fraud risks which the BNPL ecosystem is exposed. These concerns are not misplaced but may be tackled with the proper implementation of customer protection frameworks, registration processes, and for big ticket items, perhaps a hard credit check.

We, at KARM Legal, are excited to see this industry grow before us. If you are a BNPL looking for assistance in the space, do write to us and we would be happy to help.

Written by Ratul Roshan, Senior Associate KARM Legal Consultants

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