You’ve been shopping online for hours, searching for the right outfit for a special event coming up soon. Your eyes bleary, your fingers tired of clicking, you finally you come across the perfect thing—the right color, the right size, and perfectly appropriate for your event. And then you check the price, only to find that it’s out of your budget.

Enter a solution: buy now, pay later. Independent service providers such as Klarna, Affirm, and Afterpay offer consumers a means to purchase expensive products, then divide their (re)payments into regular installments. The platforms charge the sellers a fee for each transaction made, as well as for the initial setup process required to accept such payments. They also charge customers penalty fees for any missed payments.

In the decades since this iteration of buy now, pay later companies has been introduced, nearly 20 percent of shoppers have reported using this option. The industry thus generated $16.6 billion in the last two months of 2023 alone, accounting for 13 percent of all online holiday shopping in the United States. Even as we note the benefits of such programs for consumers, retailers, and the service providers though, we need to consider another actor.

The popularity of these programs has manifestly not benefited banking institutions, which lose out on fees when shoppers turn to the buy now, pay later companies directly. These transactions reduce debit and credit card use, which generates interchange fees for banks. Therefore, many big banks have begun introducing their own buy now, pay later programs. Citi, Chase, and U.S. Bank have all released options for converting existing credit accounts into a separate payment plan with a flat monthly fee for specific purchases. This alternative then enables customers to avoid adding interest to their existing credit card bills. 

In response, consumers appear pleased. Younger, digital-first generations report increased trust in banks to be able to prevent fraud. Banks also boast more advanced risk assessment tools, developed from their access to large amounts of customer data. In addition, the Consumer Financial Protection Board has instituted a new rule that requires the independent service providers to follow the same regulations as banks. Buy now, pay later programs must investigate disputed transactions, refund money when an order is returned, and provide information about interest rates before transactions take place.

Still, banking institutions have a long way to go, if they hope to compete with established service providers. Most banks have not yet implemented their offerings at the point of sale during ecommerce transactions. Likewise, buy now, pay later companies have historically imposed fees on merchants, to subsidize the contributions from consumer, something that not all banking programs have done.

Discussion Questions 

1. How should banks market their new payment plans to customers?
2. What additional regulations should be established to regulate buy now, pay later programs? Should they be applied to both banks and independent companies? Why or why not?

Sources: “Banks Eye BNPL as Way to Reach Gen Z,” PYMNTS, August 7, 2024; Ron Shevlin, “Banks Need to Get On the Buy Now, Pay Later Bandwagon,” Forbes, February 19, 2024; Veronica Irwin, “How Big Banks are Gunning for Buy-Now, Pay-Later Fintechs,” Forbes, August 12, 2024