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.

What is BNPL?

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.

How does BNPL affect merchants?

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:

• Improved cash flow — Increased transactions and higher sales value equals more money moving in and out of the business.
• Increased order value — Because payments are incremental, customers are more likely to buy more and purchase higher-priced items.
• Marketing opportunities — Promoting and prominently displaying BNPL as a payment option will help to attract new customers and seal the deal for reluctant buyers.
• Reduced fraud risk and chargebacks — BPNL providers assume responsibility for credit checks, financing, and chargebacks. Therefore, the risk for these transactions sits with the provider.

Steps for merchants toward BNPL

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:

• Performs a soft credit check to confirm a customer’s ability to pay on the loan. This review takes place on the check-out page — no need to redirect to a third-party site.
• Pays the merchant the full amount of the purchase upon credit approval.
• Receives and processes the remaining customer payments over the established term until complete.
• Assigns a fee to merchants for a percentage of each transaction, usually 2-8% of the total sale cost.

Choosing a BNPL provider

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:

• Klarna — A Swedish service that offers three interest-free payments over a period. Customers can choose from a few time frames that range from 30 days to 36 months to complete payment. Klarna serves nearly 150 million consumers worldwide. 
• Afterpay — This Australian company offers six-week terms, interest-free. Merchants pay a percentage of each transaction plus a $0.30 fee. 
• PayPal — PayPal’s ‘Pay in 4’ service covers purchases between $30 and $1,500. Payments are split into four bi-weekly, interest-free installments with no late fees.

Is BNPL risky?

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.

• Consumers spend beyond their means and potentially default on payments. This means additional provider fees.
• There is less regulation in the BNPL space. This can open the door for future issues.
• It is not yet proven that BNPL payment methods are sustainable in the long term.
• Account hijacking is a fraud risk for BNPL payment users. If it does happen, customers may not realize it right away due to the deferred installments. When they eventually do, they will likely complain to the merchant. 

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.