Comparing Buy Now Pay Later Providers

Pay a little now, take the item home today. It’s a popular new twist on lay-by, but there are some potential pitfalls to be aware of and each provider works differently so it pays to compare to find the service that’s right for you.

Buy now pay later (BNPL) has attracted plenty of attention in recent years thanks to its dramatic rise in popularity, and it’s attracting big names including CommBank, PayPal and NAB. Just four years ago, around $1.5 billion worth of purchases were made using BNPL. By the 2021/22 financial year, the RBA reports that figure had jumped to $16 billion.

Much of BNPL’s appeal lies in the way it works. Shoppers take the purchases home today, and pay them off in a series of instalments. As long as you don’t fall behind with the specified payments, no late fees or interest charges apply.

There is, however, an indirect cost to shoppers. BNPL providers make the bulk of their money by charging retailers a fee. This typically works out to be between 2% and 8% of BNPL sales, a cost that’s likely to be passed on to consumers.

The potential for late fees

As BNPL providers don’t charge interest, they don’t currently come under the National Credit Code in the way that credit card providers do. This means they don’t have to follow responsible lending regulations. However, in March 2021, a self-regulatory code of conduct was introduced by the Australian Finance Industry Association that sets best practice standards for the BNPL industry. These standards include a call on BNPL providers to complete credit checks for purchases above $2,000, and more in-depth checks for transactions above $15,000.

Even so, a Federal Treasury report found some consumers who use BNPL experience increased levels of financial stress, leading to missed BNPL repayments. That’s when late fees can apply, and the cost can quickly stack up.

When it comes to late fees, Curtin University research found falling behind on the payment schedule for a $40 purchase on 10 fortnightly repayments would result in an effective annual interest rate as high as 28.25% for Afterpay, 29.32% for ZIP, and 177.44% for Humm’s ‘Little Things’.

One recent newcomer to BNPL – PayPal, is bucking the trend when it comes to late payments. Its BNPL option – Pay in 4 – comes with zero interest, no late payment fees and no sign-up fees. Similarly, NAB’s version of BNPL – NAB Now Pay Later, charges zero interest or fees, however applicants are required to undergo a credit check.

Nonetheless, the potential to fork out late fees makes it important to understand how transactions are required to be paid off, and whether you’re in a position to avoid additional charges that add to the cost of purchases.

What’s involved

The table below looks at what’s involved with seven BNPL providers. Most require purchases to be paid off in four instalments. The exception is Humm, which allows purchases below $2,000 to be paid off in five months or less (though if you opt to make 10 fortnightly payments, rather than five, a monthly fee of $8 applies). These are all reasonable timeframes, but think about whether the pay-off period coincides with your other major household expenses being due, such as car registration or an electricity bill, which could leave you tight for cash.

It’s also important to be aware of how much you’ll pay in late fees and when they apply. There can be big variations in the cost, ranging from $10 with Commbank StepPay to no fee at all with PayPal Pay In 4 and NAB Now Pay Later .

The grace period to make good on a late payment differs too. Fall behind for a week with Afterpay, and along with the initial late payment fee of $10, you’ll be slugged a further $7. Zip Pay allows a more generous 21 days before a late fee applies. As noted earlier, PayPal’s ‘Pay in 4’ and NAB’s both have zero late payment penalties.

Compare: Afterpay, Zip Pay, Humm, Klarna, PayPal Pay in 4, Commbank StepPay, NAB Now Pay Later

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Source: www.canstar.com.au. Current as at 22/12/2022. Other fees, eligibility criteria and terms & conditions may apply, refer to the provider for more information. Spending limits may be subject to credit assessments. *Caps on late fees may apply. **NAB Now Pay Later is only available to customers who pre-registered.

The bigger the purchase the more care is required

It may sound easy to avoid late fees. But a lot can hinge on how much you spend. So far in 2022’s financial year, the average transaction using BNPL was $131. However, that figure can go a lot higher depending on the BNPL provider.

With Humm, which offers a maximum BNPL transaction of $30,000, the average transaction value is about $4,000. The bigger your purchase, the more confident you need to be about paying it off in the required timeframe.

How providers stack up on a $150 BNPL purchase if you miss a payment

To see how providers compare, Canstar crunched the numbers on a hypothetical BNPL purchase of $150. Across the BNPL providers we considered, there are zero additional costs if you pay on time.

If our shopper misses one payment, late fees apply ranging from $0 with PayPal’s Pay in 4 and NAB Now Pay Later to $10 with Afterpay and Commonwealth Bank’s StepPay. We’ve assumed our shopper catches up with the payment in time to avoid an additional penalty as would be the case with Afterpay.

Across the BNPL providers in the table below, the total cost of the purchase with one late payment runs from $150 with PayPal’s ‘Pay in 4’ and NAB Now Pay Later (no extra fees) to $160 with Afterpay and CommBank StepPay.

We have also shown the cost of the late fee as a percentage of the purchase value. The smaller the purchase, the more important the late fee becomes.

The cost of missing one Payment on a $150 purchase

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Source: www.canstar.com.au. Current as at 22/12/2022. Late fees based on a purchase amount of $150. ‘Cost if one payment late’ includes a single charge of one late payment fee and does not include any additional late fees charged after the due date or ongoing fees that may be applicable. Other fees, eligibility criteria and terms & conditions may apply, refer to the provider for more information. **NAB Now Pay Later is only available to customers who pre-registered.

The verdict

The Federal Treasury has acknowledged that BNPL can offer consumers a cheaper and easier-to-access form of credit. And if you select the provider whose payment terms best match your personal cash flow in regards to when you’re paid and when other bills will fall, BNPL can be a low-cost way to pay for purchases.

That said, it does call for self-discipline. The danger area can lie if you use more than one BNPL provider, which is the case for around two in five (40%) BNPL shoppers, or if you’re juggling multiple purchases at one time.

The launch of BNPL options that don’t come with late fees such as PayPal’s ‘Pay in 4’ and NAB Now Pay Later are making it easier to use BNPL without racking up unwanted charges. However, neither overcomes a key potential pitfall of BNPL – the temptation to overspend. Afterpay, for instance, promotes its service to merchants saying it increases the “average order value by up to 18%”. That’s great for retailers. It’s not so good for shoppers who can find themselves in deep financial hot water by loading up with purchases they’ll struggle to pay off.

These issues have seen the BNPL industry face growing scrutiny by regulators. As at early 2023, a Treasury paper released by Financial Services Minister Stephen Jones outlines three potential options for the future of BNPL. Time will tell whether this sees BNPL providers face more regulation designed to protect consumers. In the meantime it’s up to shoppers to compare BNPL options to find the provider that best matches their needs and budget.

Compare Buy Now Pay Later Services

Cover image source: Juicy FOTO/Shutterstock.com