Buy now, pay later (BNPL) has gained massive popularity over the past decade among eCommerce shoppers with tighter budgets looking for short-term, interest-free ways to pay for larger purchases over time and among shoppers who wouldn’t qualify for traditional financing options.
Done right, BNPL can be a significant benefit to merchants: A Fiserv survey found that the right BNPL option can reduce abandoned carts and increase average order value, because customers can spend more overall without going over budget on the first payment.
In this article, we answer the two most common questions retailers have about BNPL: What is it, and what do you need to know before implementing it?
Table of Contents
What is BNPL?
BNPL comes in two, basic categories: split payments for purchases under $300 and installment loans for purchases above $300.
Smaller-ticket items can offer installment payments because a merchant would stand to lose less on small purchases if the buyer turns out to be a scammer. In the split payment model, a customer purchasing a high-end vacuum cleaner on Amazon could choose the BNPL option to pay the total amount in four payments, one at the time of purchase and the remaining three payments over the next six weeks with no interest accrued and no impact on the buyer’s credit score. The customer would receive the vacuum after completing the BNPL purchase, rather than after the full amount has been paid, and accrues no interest.
For higher-value purchases, merchants should opt for the installment loan version of BNPL, which may or may not accrue interest over the six- to 48-month period in which the buyer can pay off the purchase.
BNPL differs from other, traditional financing options like layaway, point-of-sale financing, and credit cards. In both BNPL options, the customer brings home the item immediately. This contrasts with the layaway model, in which the customer purchases an item – say, a $180 jacket – and the merchant holds the item until the customer pays all installments on the jacket, at which time, the customer takes the jacket home.
Traditional point-of-sale financing differs from BNPL in the required credit checks and attendant costs for missing a payment. For example, a furniture store checks a buyer’s credit and confirms they qualify for an in-store financing. The buyer purchases a new couch for $1,900 and brings it home after making the first payment at the point of sale. The buyer then has up to 48 months to pay for the couch and, in this example, will not accrue interest if the purchase is paid in full before the 48 months expire. If the buyer misses a payment or fails to pay for the full amount in the interest-free period, the payments will increase significantly. BNPL doesn’t require such credit checks or have this level of high-interest potential.
Credit cards are similar to point-of-sale financing in terms of qualification, required monthly payments, and the possibility of interest accrual. Unlike BNPL, credit cards offer more flexible monthly payment amounts and no time-limit on paying off debt.
Essential BNPL Information for Merchants
There are three common questions from retailers looking to offer BNPL.
- When and how do we get paid? Like working with a credit card service, an external company offers BNPL services and merchants purchase that service. They receive funds immediately: the buyer pays the BNPL service, which then pays the merchant.
- What does it cost? The BNPL service usually bears the brunt of costs from chargebacks, but carefully assess all terms from a possible BNPL partner. To cover the risk, BNPL services usually take a certain percentage plus a flat-rate fee per transaction, which may increase or lower based on the risk and amount of a purchase. BNPL fees tend to be higher than credit card fees, but the investment often has high returns in the form of fewer abandoned carts and higher average order values.
- How do we offer it? BNPL is most popular with eCommerce, so an eCommerce website is a nonstarter. Merchants must then select the best BNPL service for their needs that is also compatible with their site.
Merchants can get an even greater return on their BNPL investment by widely promoting this financing option with signage, advertising, and seasonal specials and by offering this financing option in brick-and-mortar stores.
BNPL is rapidly growing in popularity among buyers, and merchants should at least consider offering this form of payment. Choosing the best BNPL provider for your business and safeguarding against fraud are the next steps in adopting BNPL and meeting customer expectations.