From the mercantile ledgers of the 1800s to the days of layaway following the Great Depression, the practice of deferring payment has existed for many years. In fact, the principle of lending and borrowing dates back to ancient civilizations.
Today, buy now, pay later (BNPL) is among the fastest-growing credit trends. The shift from brick-and-mortar retail to e-commerce during the COVID-19 pandemic coupled with economic uncertainty has fueled consumer demand for more flexible payment methods. BNPL is popular because it does not carry the same limitations as a traditional line of credit. Terms for BNPL are fixed to about six weeks, whereas credit card lenders profit from partial and late payments.
According to research from The Consumer Financial Protection Bureau (CFPB), BNPL loans from five surveyed lenders in the U.S. increased in dollar volume from $2 billion to $24.4 billion between 2019 and 2021. BNPL continues its astounding assent in 2023, with a projected U.S. market size of $94.9 billion. It has quickly become a favorite among American consumers, particularly Gen Z'ers, who are wary of traditional lending methods and the interest associated with them.
BNPL financing splits a purchase into incremental, interest-free payments over a fixed period, with the first installment paid at the point of sale. Late or lapsed payments incur late fees rather than interest. Merchants partner with BNPL providers to arrange the financing and payment processing associated with a transaction.
BNPL has its plusses and minuses for merchants. Competition in the market pushes online retailers to offer it, and the benefits are measurable, but the terms can be challenging. For example, BNPL providers can charge merchants three to four times the average credit card processing fee. This allows them to offer no-interest financing. On the positive side, BNPL can attract a range of customers, boost sales, and build customer loyalty. Other benefits of BNPL for merchants include:
For a retailer, opting into a BNPL program requires an agreement with a payment provider. The merchant creates the atmosphere for a successful BNPL experience, and the provider takes it from there. A smooth integration of the provider into the shopping experience is critical, as is the promotion and positioning of BNPL as a payment option. When a customer selects the BNPL option, the provider does the following:
There are many BNPL providers, but they are not all the same. Merchants should research to find the provider most suited to their business and its individual needs. Compare the fees associated with each provider and assess any other services they offer. Choose the provider with the best terms for the business's target market. Some of the most popular BNPL providers are:
Currently, BNPL does not come with much risk for merchants, but it is a new payment method, and some unknowns need time to evolve. BNPL providers do not undergo the same scrutiny as banks, so consumer protections are few. Additionally, the credit-building data associated with other forms of lending is not reported to agencies like TransUnion. For businesses, here are some potential risks of BNPL.
Bottom line: The risk of BNPL for businesses is low. Merchants should take advantage of this new payment method and the benefits associated with it while it’s hot. Contact us today to learn more.