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Is ″Buy Now, Pay Later″ the consumer credit magic bullet we’ve all been waiting for?

BIScom Subsection: 
Author: 
Nigel Morris-Cotterill

Buy Now, Pay Later is a rapidly growing consumer credit sector. Last year, it is reported, it was used in 3.6% of retail sales in the UK. Is it a panacea or a plague?

Long Read: 17 pages.

What is the future of the model?

The model works because money is, at the moment cheap therefore the discount met by the retailer is relatively small. However, cheap money is a hangover from the global financial crisis. Historically, central bank interest rates have averaged 10% and have sometimes been significantly higher. When the world returns to higher interest rates, Buy Now, Pay Later providers will see two things: an increase in demand and an increase in the price of the money they need to meet demand.

That will mean that those which have listed will need to keep going back to the market for more money which, ultimately, is how the dot com boom came to an end: investors eventually get fed up pumping money into loss making businesses.

The immediate threat is that costs will rise, probably in relation to late payments and defaults.

Higher interest rates will put considerable pressure on the business model. Somewhere – either or both of the retailers or the Buy Now, Pay Later service providers will need to increase their prices. If they don’t the model will fail.

It is likely that many service providers, if successful, will be bought by banks. Some will seek an Initial Public Offering. Some may mutate into banks.

But as we have seen from the M&S example, even then services become uneconomic and are closed.

Because of the short-term nature of the transactions, a closure of an individual company will not have a negative financial effect on consumers, unlike services like Wirecard which was providing de facto banking while regulators pretended otherwise.

If the sector reaches the point where it is not viable, the only real effect on consumers will be a reversal of a temporary trend. The effect on retailers will be a reduction in business where expansion has been generated by customers using Buy Now, Pay Later.

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