Is Buy Now, Pay Later The Same As Credit Cards?
Published on 11 Mar, Sheela Vijayan
Since the start of the Covid-19 pandemic, it is estimated that five million people have purchased a product through the ‘Buy Now Pay Later’ (BNPL) solution.
If you’re new to BNPL, let’s begin with how BNPL works. You can make a purchase, receive your purchase up-front, AND make your payments over instalments. With every purchase made via BNPL, retailers will then pay a fee to BNPL service providers.
With new BNPL providers popping up every week, it’s important to understand how the new payment model works, and if it’s something that benefits you as a consumer. To many, it seems to work like a credit card.
Why is it different from credit cards?
As of January 2020, data from the Central Bank of Malaysia shows that there are 9.1 million principal credit cards in circulation. Are you one of them and are you wondering: is BNPL different from using a credit card?
A prominent difference between credit cards and BNPL solutions is the computation of late fees. With BNPL, consumers will not have to deal with complicated calculations of interest and late fees associated with credit cards. This lack of transparency is a disadvantage for a credit card holder, as credit card companies often monetise when a customer is unable to make payments on time.
The application process for a credit card also takes longer compared to making a purchase through BNPL, making the new financing solution more helpful for urgent, emergency purchases. Moreover, some credit cards also charge an annual fee and for this to be waived, there is usually a minimum number of transactions or spend amount required.
When a credit card user cannot make the payment on time, there will be a late fee charged, with compounding interest. Meanwhile, BNPL is interest-free and has a simpler late fee system, which is often fixed or capped at a certain amount. In Split’s case, there are absolutely no late fees at all!
BNPL provides updated financial solutions that match customer's needs
The Covid-19 pandemic has forced the world to evolve to survive in a new normal and in a world where almost every sphere of society has drastically changed. In November 2020, the Chairman of the U.S. Federal Reserve, Jerome Powell, said this: “We’re never going back to the same economy, we’re going back to a different economy.” It aptly describes how financing services must evolve to ensure that they can continue to meet their customers’ needs.
For example, the Covid-19 pandemic is contributing to the rise of the ‘gig economy.’ The freelancer platform, Upwork, has recorded a 50% increase in its sign-ups after the pandemic hit. These gig workers might not have the necessary income statements required to apply for a credit facility. As of 2019, the minimum income to qualify for a credit card in Malaysia is RM 24,000 per annum. Gig workers might soon find themselves not eligible to apply for credit cards if they are not able to provide the required income documentation, such as a salary slip, despite meeting the earnings requirement.
Can the traditional risk assessment models in banks adapt to accommodate these changes in the employment sector? That might not necessarily be the case, and hence, BNPL would be a suitable alternative as BNPL does not rely on a traditional risk assessment model.
The benefits of buy now, pay later
With BNPL, you can make important purchases and spread the payments over instalments. It can also help consumers escape staggering late fees and compounding interest, which is a result of missing credit card payments. In Malaysia, credit card interest is between 15% - 18% per annum. Meanwhile, with BNPL, consumers will only be charged a fixed late fee depending on the provider.
Furthermore, for most BNPL providers, consumers do not have to pay anything if they make their payments on time! That's because BNPL monetises by charging the merchant, instead of the consumer similar to how Grab charges merchants a commission fee. Isn't that cool?
Is Buy Now, Pay Later The Same As Credit Cards?
Published on 11 Mar, Sheela Vijayan
Since the start of the Covid-19 pandemic, it is estimated that five million people have purchased a product through the ‘Buy Now Pay Later’ (BNPL) solution.
If you’re new to BNPL, let’s begin with how BNPL works. You can make a purchase, receive your purchase up-front, AND make your payments over instalments. With every purchase made via BNPL, retailers will then pay a fee to BNPL service providers.
With new BNPL providers popping up every week, it’s important to understand how the new payment model works, and if it’s something that benefits you as a consumer. To many, it seems to work like a credit card.
Why is it different from credit cards?
As of January 2020, data from the Central Bank of Malaysia shows that there are 9.1 million principal credit cards in circulation. Are you one of them and are you wondering: is BNPL different from using a credit card?
A prominent difference between credit cards and BNPL solutions is the computation of late fees. With BNPL, consumers will not have to deal with complicated calculations of interest and late fees associated with credit cards. This lack of transparency is a disadvantage for a credit card holder, as credit card companies often monetise when a customer is unable to make payments on time.
The application process for a credit card also takes longer compared to making a purchase through BNPL, making the new financing solution more helpful for urgent, emergency purchases. Moreover, some credit cards also charge an annual fee and for this to be waived, there is usually a minimum number of transactions or spend amount required.
When a credit card user cannot make the payment on time, there will be a late fee charged, with compounding interest. Meanwhile, BNPL is interest-free and has a simpler late fee system, which is often fixed or capped at a certain amount. In Split’s case, there are absolutely no late fees at all!
BNPL provides updated financial solutions that match customer's needs
The Covid-19 pandemic has forced the world to evolve to survive in a new normal and in a world where almost every sphere of society has drastically changed. In November 2020, the Chairman of the U.S. Federal Reserve, Jerome Powell, said this: “We’re never going back to the same economy, we’re going back to a different economy.” It aptly describes how financing services must evolve to ensure that they can continue to meet their customers’ needs.
For example, the Covid-19 pandemic is contributing to the rise of the ‘gig economy.’ The freelancer platform, Upwork, has recorded a 50% increase in its sign-ups after the pandemic hit. These gig workers might not have the necessary income statements required to apply for a credit facility. As of 2019, the minimum income to qualify for a credit card in Malaysia is RM 24,000 per annum. Gig workers might soon find themselves not eligible to apply for credit cards if they are not able to provide the required income documentation, such as a salary slip, despite meeting the earnings requirement.
Can the traditional risk assessment models in banks adapt to accommodate these changes in the employment sector? That might not necessarily be the case, and hence, BNPL would be a suitable alternative as BNPL does not rely on a traditional risk assessment model.
The benefits of buy now, pay later
With BNPL, you can make important purchases and spread the payments over instalments. It can also help consumers escape staggering late fees and compounding interest, which is a result of missing credit card payments. In Malaysia, credit card interest is between 15% - 18% per annum. Meanwhile, with BNPL, consumers will only be charged a fixed late fee depending on the provider.
Furthermore, for most BNPL providers, consumers do not have to pay anything if they make their payments on time! That's because BNPL monetises by charging the merchant, instead of the consumer similar to how Grab charges merchants a commission fee. Isn't that cool?
