“Entering into debt trap”: so dangerous is the installment purchase with paypal& co.

"buy now, pay later": this is how dangerous it is to buy in installments and on account with paypal, klarna and co.

More and more people are using the "buy now, pay later" payment method to pay off ordered online products in installments.

Experts criticize that creditworthiness is lost if the amounts involved are small.

"for people who are short of money anyway, ‘buy now, pay later’ can be an entry into the debt trap," warns katharina lawrence from the consumer advice center in hesse.

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New sneakers, a bag, two pairs of jeans to choose from and a new winter jacket wouldn’t be bad either. lying on the sofa with their smartphone, customers can select and order everything with a few clicks and a little thumb wiping via app. Fast, convenient, simple. But one thing usually bothers: the price. At the same time, paying 100 euros at zalando, 250 euros at media markt and 150 euros at otto is something that few consumers can or want to afford. Especially if you order a part in several sizes and you know that some parts will be returned.

But payment service providers have come up with something to solve this problem: "buy now, pay later" is the name of the payment method, often shortened to BNPL. The name is self-explanatory: you buy the product now and pay for it later, usually in installments – taking out small loans, so to speak. you can order sneaker, bag, jeans and jacket directly and don’t have to pay the cost of about 400 euro all at once, but can split the sum over several months. Or pay two weeks later after receipt of the goods using the purchase on account principle.

The BNPL business is booming, as shown by a study by the analysis firm juniper research. In 2021, around 340 million people worldwide will use BNPL, spending 266 billion dollars, the analysis predicts. Juniper analysts estimate that in five years, 1.5 billion people will be spending around one billion dollars using this method. That is almost four times as much money as today. This would increase the BNPL share of transactions in the global e-commerce market from nine percent today to 24 percent by 2026. "BNPL is becoming increasingly attractive, especially to millennials and representatives of Generation Z, who may have trouble obtaining a credit card because of their thin credit files," explain juniper research experts.

Installment purchase, but in cool

Payment service providers such as the swedish company klarna and paypal from the uSA have recognized the potential. But traditional retailers are also entering the payment business: zalando has even set up its own subsidiary in this country for payment in its own online store. Zalando payments buys the receivables from the parent company and then processes the corresponding transactions. otto is doing the same. The mail order giant has been offering payment by installment through its subsidiary otto payments for years, but plans to offer the services to other retailers on the otto platform in the future as well.

The model of paying later is actually not entirely new. Because purchase on account and payment in installments have existed in germany for a long time now. However, these financing models were rarely offered by dealers, usually only for expensive purchases such as buying a car. New payment providers like klarna, which make paying for online shopping easy and almost "sexy" with their pop pink app and advertisers like lady gaga and rapper asap rocky, are now taking BNPL to the masses.

About half of klarna’s customers now use BNPL options, 16 years after the payment service provider was founded. Customers in germany have the option of paying up to 14 days after receiving the goods with the "purchase on account" option. For a small fee, the payment period can be extended to up to 60 days. As klarna states on request, this type of payment is intended to be "flexible and risk-free" for customers. Because the payment service provider assumes the entire risk if goods do not arrive or are damaged, or if customers want to return something.

Over 70 percent would pay with BNPL

This is also shown by a recent study by the fintech company credi2, which is developing BNPL payment methods for banks and retailers. More than 70 percent of 18- to 34-year-olds would pay with this method in order to be able to shop more spontaneously or afford a higher-quality product.

"the whole process has to be simple, though," says credi2 CEO daniel strieder. For this is the key advantage ofnbnpl offers compared to credit cards. "Hardly anyone is still prepared to go through the hassle of applying for a loan at their bank and then waiting for the money to be paid out. For customers, it will be a matter of course that credit is integrated smoothly into the purchasing process."Three out of four respondents also expected a fast credit approval within a few minutes and flexibly adjustable credit installments.

In contrast to traditional loans, with BNPL a customer does not have to fill out complicated forms or disclose his solvency. A credit check is carried out at klarna using a quick algorithm query; date of birth and email address must be provided. In the background, klarna checks the creditworthiness of customers on the basis of "hundreds of data points" from a wide variety of sources, such as schufa, the company says.

With just one click, the buyer can decide whether to pay off the 100-euro sneaker regularly with, say, ten euros a month, instead of 100 all at once.

There is hardly any risk for merchants

The reason why more and more online stores such as monki, adidas or H&M are now also offering purchases in installments or on account is probably that klarna, according to its own statements, assumes the entire risk of default and fraud. In addition, merchants receive the full amount in advance, which the customers may only transfer to klarna later for the order. To use the service, merchants in germany paid a fee of 2.99 percent plus 35 cents per transaction without any start-up fee, klarna says. Worldwide, more than 250.000 merchants use the services of the payment service provider. None of the retailers asked would like to answer how much the order volume has increased for the individual retailers as a result. However, it stands to reason that customers order significantly more than usual as a result of BNPL.

Since march 2021, customers of the payment service provider paypal have also been able to pay from a sum of 199 euros up to 5.pay 000 euros by installments. The catch with installment payments, however, is interest rates. For the fact that the customer may pay later, he must pay more in total. With paypal, the effective annual interest rate is 9.99 percent. As business insider has already reported, thomas mai of verbraucherzentrale bremen thinks this is too expensive in the current interest rate environment.

Payment service providers and merchants benefit from high interest rates or reminder fees

The interest rates on such offers are often "extortionate," says economist Gerrit Heinemann. the head of the eweb research center at the university of the lower rhine says: "retailers benefit when customers can’t pay their invoices, because they can then issue reminder fees or interest," says heinemann. "in many cases, this is the business model behind such ‘buy now pay later’ offers."this is shown by figures from the zalando subsidiary zalando payments: the revenues come mainly from reminder fees and totaled 43 million euros last year, as the financial portal "finanzszene" writes. "merchants and payment service providers therefore profit when consumers go into debt," summarizes gerrit heinemann.

Often, low-income households or those in short-term financial need would turn to such payment models, heinemann said, to purchase something they desperately needed but couldn’t afford right away. "these people make up a large market i estimate at least three million people in germany , which the retailers and providers of such payment methods have recognized and now want to exploit the market potential, while these households run the risk of falling into the debt trap," says heinemann. Because there is of course a risk that consumers will spend more than they can afford.

katharina lawrence, a financial expert at verbraucherzentrale hessen, also sees this development as problematic "there is a danger that inexperienced consumers will get into too much debt because installment payments are convenient at first," says lawrence in an interview with business insider.

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