Maya-on-money-logo
You are Here > Home > My Debt > Is “Buy Now, Pay Later” good for your pocket?

Is “Buy Now, Pay Later” good for your pocket?

Mar 1, 2022

Buy Now, Pay Later (BNPL) has taken the world by storm, and has now hit online retailers in South Africa. What is it all about, and is it good for consumers?

Is BNPL good for your pocket?If you regularly shop online, you will notice that there has been an exponential growth in different payment options, especially for credit.

Mobicred is the RCS-backed online credit provider which comes with the usual high fees and interest. However, new players like PayFlex, PayJustNow and Float are introducing the Buy Now, Pay Later (BNPL) model to South Africa.

As the name suggests, you buy now, receive the goods, and make payment via a series of installments. This sounds like a regular credit agreement, except with BNPL, there are no fees or interest. The payment providers get paid from a fee charged to the merchant.

Cost- free credit is why Buy Now, Pay Later (BNPL) has taken the world by storm and BNPL companies have been among the fastest growing in the world.

In the UAE region alone, the market is expected to be worth US$1.8 bn in 2022. According to the BBC, an estimated 15 million adults in the UK are actively using BNPL to make purchases, and studies in the US estimate that over one-third of US consumers have used a BNPL service.

It is clearly great for shareholders, but is it good for the consumer’s pocket?

The BNPL model lets you pay off your item at no extra cost. Your purchase is divided into multiple equal payments, with the first payment due at checkout. The remaining payments are billed to your debit or credit card. This could be over several weeks or months, depending on the financial model.

Pros and Cons

Whether this is positive for our pocket depends on our behaviour. It can be great for savvy consumers who use it to spread their payments without incurring interest, and manage their cashflow.

BNPL loans fall outside of the National Credit Act as there are no fees or interest, so there are no credit checks. It could be a good solution for people with poor credit records, or those who don’t want credit cards or other loans.

But BNPL could easily encourage impulse spending. You don’t need to have money now to make the purchase, and paying for it in installments of a few hundred rand doesn’t feel that onerous, so you are more likely to do it.

This could lead to an over-extension of credit, especially if you find online shopping very hard to resist. That pair of shoes you have fallen in love with are now even easier to buy. Fall in love with too many shoes, and you may start struggling to meet the repayments and face enormous penalties.

With PayFlex, each missed payment costs you R65. If your loan is R1 000, that works out to a 6.5% fee. If you keep missing payments, the fees keep climbing. PayFlex charges R65 for every week the payment remains unpaid with a cap at R195. PayJustNow charges R125 every time a payment is missed. Penalties are capped at 25% of the transaction value.

Only offered for lower-value items

Paul Behrmann, founder and CEO of Payflex, which was first launched in 2018, says the model is only viable if the lender is able to collect the repayments, so it is in the interest of the loan provider to make sure they do not overextend to consumers.

They tend to limit the amount they approve to R2 000, although that can increase as a consumer builds up a track record. Behrmann says it is not ever intended to be used for higher-value items.

PayFlex is currently available across 1 350 merchants. Behrmann says that so far, customers have shown good repayment patterns. The average basket is R1 200 and the average repayment is R300 with over 98% of customers meeting their repayments.

Two models: using new credit or existing credit

PayFlex and PayJustNow: traditional BNPL using new credit

You see a pair of trainers on the Cape Union Mart website for R1 199. You select to pay either via PayFlex or PayJustNow which are the two main players in the BNPL space.

If you select PayFlex, you’ll be redirected to register on their website. You can select to repay over six weeks which is done in four installments of R299.75. The first amount is deducted immediately and the remaining three are deducted every second week from your debit or credit card. You are sent a reminder to make the payments.

If you select PayJustNow, again you register on their website and can then select an option for three payments of R399.67 over two months. The first is deducted immediately and the remaining two payments are deducted in the consecutive months.

Float: using your existing credit card facility

Unlike PayFlex and PayJustNow, BNPL provider Float uses your existing credit card facility. Float reserves the full amount of the purchase on your credit card, but only deducts actual payments from your credit card once a month over a period of four to six months.

This is aimed at consumers who want to make larger purchases by extending their interest-free period beyond their credit card’s 55-day period.

For example, you want to buy a new bed online from Dial-a-Bed. The mattress costs R6 000. If you put that on your credit card budget facility to pay it off over six months, you would pay interest of around 17% per annum. By selecting the Float payment option, you agree to an amount of R6 000 being reserved on your credit card (the same mechanism as when you rent a car). As this is only reserved and not deducted, no interest accrues. There is no need to register separately with Float ‒ it is all done on the merchant’s website.

You agree to a six-month repayment of R1 000 per month. The first payment of R1 000 is deducted immediately and each month Float deducts a further R1 000 from your credit card. The reserved amount reduces in line with the payment. If you pay your credit card provider the R1 000 in full at the end of the month, you avoid any interest payment – even though you are paying over six months. This is a very smart way for savvy consumers to manage cashflow. As the credit agreement is with the credit card provider, there is no risk to Float and therefore Float does not apply penalty fees.

Float CEO Alex Forsyth-Thompson says using existing credit facilities ensures that consumers are not taking on more credit but rather using their credit more efficiently by avoiding unnecessary interest payments.

Forsyth-Thompson says credit card instalment products like Float have been a way of life in places such as Brazil, Mexico, Argentina, Turkey, and Israel for many years.

According to the Brazilian Association of Credit Card and Services Companies, 62% of consumers who use credit cards purchase in interest-free instalments every month.

“With BNPL expected to reach more than R4.5 billion in South Africa by the end of 2021, we’re likely to see significant adoption of credit card-based instalments in our own market,” says Forsyth-Thompson

This article first appeared in City Press.

0 Comments

Submit a Comment

Your email address will not be published.

Maya Fisher-French author of Money Questions Answered

Previous Articles

Pin It on Pinterest

Share This