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Mar 1, 2023 | 12 minute read

Everything You Need to Know About Buy Now, Pay Later

written by Kirsten Aebersold

With the increased demand for online shopping and flexible spending solutions in every conceivable area of life, especially since COVID first hit and drove more shoppers inside, buy now, pay later (BNPL) payments have become a key part of the payment landscape. Merchants today are finding BNPL programs an essential part of their payment option lineup and a critical way to keep up with the competition. 

These deferred payment types allow customers to keep shopping as they normally would during uncertain economic times or facilitate making larger purchases that they might not otherwise be able to afford by paying them off over time. This enhanced payment flexibility not only ensures sales remain strong in otherwise “soft” economies but also helps businesses increase their customer pool to those that might otherwise be “priced out” of their product offerings. 

In this post, we'll explore what buy now, pay later is, how it works, and why you (and your customers) might want to take advantage of its benefits. 

What Is Buy Now, Pay Later? (BNPL)

Buy now, pay later payment options are a form of installment loan. With this payment type, a shopper's purchase is broken up into equal installments, the first of which is due at the time of sale. The rest of the amount is then charged to their debit or credit card at a set rate, such as every two weeks or every month until the total amount is paid.

These buy now, pay later plans allow shoppers to receive their purchase immediately while splitting the cost into installment payments rather than paying all at once. This can be a huge help to buyers managing their finances in a down economy or to consumers who are eager to make a large purchase but don’t have all the funds they need at the moment.

However, while the trend to buy first and pay over time with deferred payments, like BNPL arrangements, is definitely growing, it's important to consider how this payment setup will affect your cash flow and point-of-sale operations overall. 
Next up, we’ll dive deeper into how buy now, pay later works, and what types of BNPL programs are available. 

How Does Buy Now, Pay Later Work?

Certain providers may offer plans that come without any interest or fees, while some plans may include both.

Many buy now, pay later companies only need a soft credit inquiry to approve a purchase, which doesn't have a negative effect on a customer's credit rating and can make the process of using BNPL less intimidating. On the other hand, some require a hard pull of a consumer's credit report, which can result in a slight, temporary credit score dip and may make a customer think twice about buying their items. 

Buy Now, Pay Later Pros And Cons

Buy now, pay later payment methods have a lot to offer to both consumers and merchants, but it's not all sunshine and rainbows.

While cash-strapped shoppers can still make purchases in lean times, offering BNPL options can be costly to merchants. Many popular BNPL companies charge fees ranging from 2-6%, on top of other existing costs such as credit card processing fees. Over time, these costs can really add up and cause merchants to doubt whether offering a buy now, pay later program is really the best option. 

Below, we'll examine not only these considerations but a full range of pros and cons of starting or continuing a buy now, pay later program. 

Pros of Buy Now, Pay Later

  • Fast Rollout and Easy Approval: Buy now, pay later programs are relatively easy to set up and can be implemented quickly, both for brick-and-mortar locations and eCommerce stores. Merchant approval is also usually fast, so you won't have to wade through endless paperwork or invasive info-gathering from your service provider.
  • Boosted Sales: This can be a great way to increase sales figures by allowing people to buy things they otherwise may not be able to afford. Having these options available is particularly useful when the economy isn't doing so well, and people tend to go for payment deferment or credit deals.
  • Higher Purchase Amounts: Consumers are more likely to buy more when they can pay in installments, as opposed to paying the full amount upfront. This can be a great way to increase your average order value and boost sales overall.
  • Interest-Free Options: If a shopper takes advantage of the interest-free options offered by some buy now, pay later providers and pays off their balance on time, buy now, pay later can actually put them ahead financially by helping them save money when they need it while avoiding extra fees by paying it off on time. 

    This creates goodwill between you and your buyers, making it more likely that they'll visit again, buy more, and potentially even use your buy now, pay later program again.
  • Convenient and Easy to Set Up: We all love the convenience of apps, and thankfully, many buy now, pay later providers have built-in apps to help customers find deals and manage their payments. The fact that they don't require separate applications or additional processing times makes them almost as easy to use as entering a credit card number. This simplicity makes it a no-brainer for many consumers to take advantage of BNPL offers, creating more opportunities for them to shop with your brand.  
  • Mitigated Risk of Default: Buy now, pay later programs are essentially loans that customers take out, and even the most well-intentioned consumers can sometimes default. However, if a customer defaults on their payments on a purchase bought using a BNPL program, the merchant’s risk of loss is mitigated, as the buy now, pay later provider will absorb the shortfall. This makes this payment option an attractive one for merchants concerned about extending credit or allowing payments over time, as they won’t be the ones left “holding the bag” in the case of a default. 

Cons of Buy Now, Pay Later

  • Higher Payment Processing Costs: As mentioned earlier, BNPL programs are associated with higher costs to merchants, typically between 2-6% of the purchase value in addition to standard credit card processing fees. These additional costs can eat into profit margins and water down the benefits of higher sales and overall larger purchases that buy now, pay later options can create.
  • Late Fees: If customers forget to make a payment or don't have sufficient funds in their linked bank account, they're likely to run up against a late fee. While these tend to be reasonable flat-rate fees similar to those charged by credit card companies, they can add up over time and create a feeling of "buyer's remorse" for your customers.
  • High Interest Rates: While the more standard “pay in 4” BNPL payment systems typically don’t charge much interest, if any, some apps come with interest-free agreements that last only a short while. Other apps charge high interest rates for longer-term plans, which might still be worth it to a consumer looking to extend their payments out as far as possible. In the case of apps that charge interest, the rates typically offered have a tendency to be even higher than credit card interest rates, which can make it harder for consumers to pay off their purchase and actually make them less likely to do so over time. 
  • Risk of Merchant-Shopper Disintermediation: Merchants sometimes worry about the risk of customers being drawn away from their website to the BNPL provider's platform if they find it to be a more convenient experience. They worry that this could result in a loss of revenue, as customers would not be exposed to other products and may have smaller orders or may not even buy from the original merchant. 

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Types of Buy Now, Pay Later Loans

Overall, there are two types of BNPL loan types: loans with interest and loans without. Let's take a look at how they both work and which one is likely to be a better deal for merchants or their customers.

Loans With Interest

These in-the-moment loans give the consumer the opportunity to make their purchase right away, with interest rates comparable to those of a credit card. These providers will sometimes offer interest-free periods similar to promotional rates on new credit cards in order to entice new buyers to "take the plunge."

Interest-Free Loans

While these types of loans might seem too good to be true for a consumer, they're the opposite for a merchant. With these types of loans, the merchant pays a fee to the third-party lending company rather than the consumer paying interest on the loan, essentially paying for the privilege of giving their customers the option to use a buy now, pay later service.

Generally, both buy now, pay later loan types will have a fixed repayment timeline. For example, if a customer is interested in an item that comes with a no-interest four-part installment plan on a $1,000 purchase price, they'll pay $250 a month for four months, starting at the time of sale. These timelines usually have fees and deferred interest charges attached to them if a customer is late for or misses a payment, creating incentives for consumers to make their allotted payments on time and in full. 

Differences Between Third-Party and Credit Card BNPL Offers

The form of buy now, pay later offered by credit card companies works a little differently than third-party point-of-sale financing, such as through an app. For one thing, BNPL offers are typically only available at the time of purchase but can show up as an available option on qualifying purchases on a consumer's statement. These plans can also carry a monthly payment fee in addition to the monthly installment amount, and some also charge interest in addition, which can make them more costly to consumers than using a credit card.  

For merchants, too, the differences usually come down to costs, such as the dual costs of processing both a credit card and a buy now, pay later option for a consumer versus the costs of credit card processing alone. 

6 Buy Now, Pay Later Examples

While there are dozens of buy now, pay later options available for merchants, there are a few that hold a larger market share or are more widely used than the rest. 

Let’s take a look at five of the largest and most trusted BNPL providers from around the world.

1. PayPal

PayPal might be more well-known as a secure online payment system or person-to-person cash transfer app, but it's also a BNPL lender. 

Its star lending product is called Pay in 4, which gives consumers the option to split the cost of a purchase into four scheduled payments without interest. This service is only available if the purchase is between $30 and $1,500 (compare this to services like Affirm can loan up to $17,500). Its interest rate stands at 24%, putting it in about the middle of the pack for comparison-shopping consumers. 

2. Klarna

Established in Sweden in 2005, Klarna now boasts a customer base of over 85 million and collaborates with hundreds of thousands of retailers worldwide. 

Depending on the borrowing type, Klarna may run a soft or hard credit check on potential customers. Interestingly, instead of setting strict borrowing limits, however, Klarna employs a metric known as Purchase Power. Its website describes it as "an estimated amount based on factors such as your payment history and outstanding balance with Klarna." 

Those with good credit and a good payment record could be eligible for larger loans from Klarna than from other BNPL vendors. The maximum interest rate, if applicable, is 25%.

3. Affirm

Affirm is one of the most popular buy now, pay later vendors, and can be found as an option to pay at big-name brands like Amazon and Target. 

For shorter-term loans (such as four payments with a two-week gap in between each), consumers have no interest or fees to pay with Affirm. Longer-term loans might have interest rates from 10 to 30% APR, based on credit score, but still no fees. 

4. Afterpay

Afterpay originated in Australia but is now owned by Block, formerly known as Square. It's even bigger than Affirm, securing partnerships with over 100,000 retailers. 

One of its most noteworthy functions is its smart credit limit tool, which establishes a personal spending ceiling for purchasers based on their credit background, which can help consumers to stay within their means and avoid buyer's remorse later on. It also sends out reminders for people to make their payments, and its virtual card service is easy to use. 

Unlike Affirm, Afterpay has late fees. Consumers who make on-time payments can avoid them. Interest rates are the same as Affirm, within the 10% to 30% range.

5. Shop Pay Installments

Shopify has its own BNPL system known as Shop Pay Installments, made possible by a partnership with Affirm. When business owners use Shopify for their online store, their customers can purchase items in four interest-free payments, and the seller still receives the full amount up front. 

This buy now, pay later system also allows small businesses to benefit from the same advantages that bigger retailers enjoy - like a larger average order cost and fewer abandoned carts. 

6. Stripe

Stripe also offers a buy now, pay later option for retailers selling high-value products to help boost conversions, as well as retailers selling low-value products that want to increase cart size and the size of their customer pool. Stripe supports Affirm, Afterpay/Clearpay, and Klarna with repayment options of 3 or 4 interest-free installments.

Elastic Path Payments, powered by Stripe, offers best-of-breed commerce solutions for brands to achieve higher checkout completion rates, increased payment acceptance, and lower fraudulent transaction rates.

How to Get Started With Buy Now, Pay Later

Buy now, pay later services are becoming increasingly popular as a way to make online shopping more convenient and affordable. With these payment options, shoppers can purchase items in the moment and pay for them later in smaller installments, making it easier than ever for customers to manage their finances while maintaining their standard of living. 

If you're a business that wants to jump on the BNPL bandwagon and take advantage of this growing trend, EP Payments, powered by Stripe, from Elastic Path might be just the solution you need. Just get in touch with one of our experts today to find out more about how EP payments can help you increase sales and average transaction value while also building customer goodwill and loyalty.