A simplified guide to Buy Now Pay Later (BNPL), its pros and cons, and how establishments can obtain a permit for this service in Saudi Arabia.

Salla: The Future of E-commerce

What is Buy Now Pay Later (BNPL)?

 Buy Now Pay Later (BNPL) is a type of short-term financing that allows consumers to make purchases and pay for them over time, usually interest-free. You can learn how to start your e-commerce business.

How does Buy Now Pay Later (BNPL) work?

 Buy Now Pay Later (BNPL) has different terms and conditions, but generally offers short-term loans with fixed payments where you can use a BNPL app to make the purchase, or you may have installment options through your credit card.

With BNPL, you can make a purchase at a participating retailer and choose the Buy Now, Pay Later option at checkout. If approved, you make a small down payment, such as 25% of the total purchase amount. You then pay off the remaining balance in a series of interest-free installments, usually over a few weeks or months.

Payments can be automatically deducted from your debit card, bank account, or credit card. You may also be able to pay via check or bank transfer in some cases, although the Consumer Financial Protection Bureau (CFPB) says most BNPL lenders leave consumers with no option other than autopilot.

The main difference between using BNPL and a credit card is that credit cards generally charge interest on any balance carried over to the next billing cycle. Although some credit cards offer 0% Annual Percentage Rates (APRs), it may only be for a limited time. With a credit card, you can carry a balance or use your line of credit indefinitely.

BNPL apps typically do not charge interest or fees and have a fixed repayment schedule. 

General Statistics on Buy Now Pay Later (BNPL):

• During economic times of high inflation and rising interest rates, BNPL can be a useful option for people making frequent purchases.

• The number of BNPL loans originated in the US by the five surveyed lenders grew from 16.8 million to 180 million from 2019 to 2021, according to a September 2022 report by the CFPB.

• BNPL is one of the most popular financing methods for purchasing and pricing products in beauty and apparel, but it is expanding to other areas like travel, pet care, groceries, and gas, with most BNPL loans ranging between $50 and $1,000.

• Companies like Affirm and Klarna offer financing for purchases at participating retailers. One, a majority-owned venture by Walmart, announced plans to offer BNPL financing in 2023. Some credit card issuers, like Chase and American Express, have also created similar financing arrangements.

• While BNPL can help you make the purchases you want, if you are not careful, it can put you in a position of carrying too much debt, which will affect your credit score.

Impact of BNPL on your credit score:

Most BNPL companies only require a soft credit check for approval, which does not affect your credit score. However, others may perform a hard inquiry on your credit file, which can temporarily knock a few points off your score.

Some BNPL loans are reported to one or more of the three major credit bureaus and can appear on your credit reports, impacting your credit score.

Note:

If the BNPL loan is not reported to a credit bureau, it will not help you build a good credit history like a credit card would.

It is important to ensure you can make the monthly payments after being approved for a BNPL loan. If you fail to make your monthly payment on a BNPL loan, your credit history will be affected, which will naturally impact other financial outcomes in a negative way. 

Pros and Cons of BNPL:

BNPL financing agreements allow consumers to pay for things over time without interest fees. It is possible to get approved for this type of financing even if other loan options are closed off due to a low credit score or lack of credit history.

BNPL loans do not add to your credit card debt, but they do add to your personal loan debt, meaning they will not affect your credit score unless you fail to pay.

On the other hand:

Repaying a BNPL loan will not help you establish good credit, and you may also miss out on perks that credit cards offer, such as cashback points or rewards.

It can also be a hassle if you want to return an item purchased via BNPL, as there can be a delay until the merchant informs the BNPL lender of the refund, meaning you may have to keep making payments in the meantime. If you do not pay them, the late or missed payment may be flagged, leading to extra fees and a potential ding to your credit score.

In brief:

Pros of BNPL:

• A convenient way to pay for purchases over time.

• Often zero interest or lower interest rates than credit cards.

• Good credit/high credit score is not necessary to qualify.

• Quick approval.

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Cons of BNPL:

• Difficulty tracking payments.

• Missed or late payments result in late fees and can damage credit scores.

• No rewards or cashback on purchases.

• Payments may continue even if the product is returned.

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Promotional offers can play a role in building potential customers.

Licensing of BNPL service providers by the Central Bank in Saudi Arabia

All establishments wishing to engage in Buy Now Pay Later (BNPL) activity in the Kingdom must obtain a permit from the Central Bank before practicing the activity, based on the provisions of Article (4) of the Saudi Central Bank Law issued by Royal Decree No. (M/36) dated 11/04/1442 AH, and Article (10) of the Finance Companies Control Law issued by Royal Decree No. (M/51) dated 13/08/1433 AH.

The Central Bank stressed the necessity of obtaining the permit before practicing BNPL activity, and that existing establishments must correct their status and apply to the Central Bank for the permit to continue practicing the activity, or cease practicing it before the end of the specified period to avoid legal penalties.

You can request the permit here.

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Examples of BNPL payment methods in Salla:

Salla helps stores offer BNPL through several authorized services such as:

1. Tabby:

Stand out from other stores and join a group of the largest stores in the region like 6th Street, Golden Scent, and Abdul Samad Al Qurashi by providing a flexible and easy payment method for your customers with Tabby. Adding Tabby as a payment option on your store will boost the chances of increasing sales, as the service encourages your customers to buy from your store without worrying about the purchase amount!

Steps to activate integration with Tabby:
Visit the Help Center here.

2. Tamara:

Tamara is a BNPL service with no fees for customers. You can order the product you need and pay 30 days after shipping.

Steps to activate integration with Tamara:
Visit the Help Center here.

3. Spotii:

Spotii is a payment solution equipped with technology that enables shoppers to shop now and pay later, absolutely interest-free, split over four equal installments. Offering "Shop Now, Pay Later" has been proven to increase average cart size by 50-70%, boost conversion rates by 20-40%, reduce refunds by up to 30%, and decrease the need for discounting while raising customer loyalty and engagement.
Steps to activate integration with Spotii:
Visit the Help Center here.