11 July 2023 | Published by John Clark
As a small business, upgrading or expanding your payment options is a no-brainer. Giving your customers more ways to pay not only makes your business more accessible, but offering multiple ways to pay can increase revenue by nearly 30%.
We all know what the benefits of card are, so let’s look at another payment method that’s been taking the world by storm: Buy Now, Pay Later (BNPL).
Buy Now, Pay Later is expected to account for nearly a quarter of all global ecommerce transactions by 2026, so there’s never been a better time to brush up on your knowledge and learn how it can help boost customer satisfaction and sales.
We’ll walk you through exactly what it is, how it works, and all the things you need to know about implementing it as a payment method for your ecommerce business.
Buy Now, Pay Later is a payment method that allows customers to make purchases without giving payment upfront. Instead, the transaction is paid on credit and payment is deferred to a later date.
With this option, consumers can buy products or services immediately and spread the cost over time, often interest-free or with low-interest instalment plans. For example, a customer can purchase an item using Buy Now, Pay Later and will pay the full amount at a fixed date in the future, or they can repay the cost in set instalments.
BNPL is a loan-like system in which customers opt to repay the cost at an agreed-upon date. When a shopper chooses to pay with BNPL, a soft credit check is carried out on their credit history; if it checks out, a point-of-sale loan is given to the customer to ‘pay’ for their purchase without having to physically hand over any funds.
The amount customers can choose to pay via BNPL, the repayment instalments, and interest fees for late repayments can vary from provider.
Initially launched online, BNPL can now be used in brick-and-mortar as well as ecommerce stores.
Here’s a quick overview of how Buy Now, Pay Later works for ecommerce transactions:
We all know that happy customers are a huge win for businesses, but aside from giving consumers a more convenient way of paying for goods, there are plenty of benefits for retailers too.
Here are some ways that merchants can benefit from setting BNPL up on their website or in their stores:
BNPL can boost sales by reducing purchase barriers. It lets your customers make immediate purchases without needing to make the full payment upfront, increasing their purchasing power. This can lead to higher order values and conversion rates.
By offering Buy Now Pay Later, you open up your store to a wider and new demographic of consumers. You can attract customers who prefer flexible payment options, or those who may have budget constraints and prefer to spread out their payments over time.
Providing BNPL as a payment option can enhance the overall shopping experience for customers. It caters to their preferences by giving the option of tailored payment methods, which can also increase customer satisfaction and loyalty.
Happy customers are more likely to come back to you for future purchases and even recommend your store to others. Research conducted by Harvard Business Review Analytic Services has revealed that 70% of UK respondents were more likely to shop with a merchant again if they offered BNPL.
Additional research by Bain also found that 38% of merchants spotted increased loyalty after introducing BNPL.
The same research from Bain also revealed that 57% of merchants who offered BNPL saw an increase in basket conversion. This means that customers who hesitate to make a purchase due to the full upfront cost could be more likely to convert if they can pay later.
Plus, it was found that 70% of UK shoppers decide how they want to pay before even getting to the checkout stage. So, suppose a customer already has their mind made up about how they want to purchase from you, but your store doesn’t support that payment option. In that case, you could be ruining your chances of making a sale.
As with any payment method, there are also some reasons why Buy Now, Pay Later may not be the perfect fit for your business. Here are some things to consider:
The first thing you’ll need to do to get set up with Buy Now, Pay Later is to integrate it into your existing check-out flow. While some providers, like PayPal, offer BNPL payments as part of their contract, you might find yourself needing to call on the help of a specialist third-party provider.
Your provider will take care of any technical requirements to start you on your way, but it won’t come for free. Most providers charge an initial set-up fee and the process to find and negotiate a deal will also require thorough research.
If you do decide to partner with a third-party provider to integrate BNPL payment services, you’ll typically have to pay a percentage-based fee per transaction. The provider may also charge a fixed fee on top of the percentage per purchase too.
These fees might not be a lot, but they can add up – especially if your profit margin is quite small. Along with all the other costs associated with running a business, you might find that offering BNPL payments aren’t as profitable as you first thought.
While Buy Now, Pay Later can open the door to more sales from customers who otherwise might not have been able to pay upfront, it can increase your return rate. This is because BNPL gives consumers a cost-free way to ‘try before they buy’ and can easily return any items they don’t want, without any money needing to leave their bank account.
If you’re a business that covers the cost of returns for your customers, this could also deplete your profits even more.
This last drawback might not impact your business directly, but it can have a big effect on your customers. And happy customers are any business’s bread and butter for achieving sales and long-term growth.
As BNPL is essentially a loan, there’s a high-risk that some customers may not be able, or remember, to pay the borrowed money back. This can put them in a sticky situation with a chance of incurring late fees, increasing the cost that they have to pay, or even hurting their chances to borrow money in the future.
Generally, merchants will have to pay an initial set-up fee to get BNPL up and running online or in-store. Buy Now, Pay Later providers also make money from retailers by charging a fixed fee per purchase and a percentage-based fee per transaction. This is usually between 2-8% of each sale, plus the set fee on top of each transaction.
The set-up and fee-per-transaction cost varies depending on the BNPL provider you choose to integrate with.
Chargebacks – when a bank forcibly reverses a transaction, returning a customer’s money from the merchant’s account and onto the customer’s payment card – won’t affect a merchant if issued.
In fact, BNPL can actually reduce the amount of chargebacks issued to your business.This is because, in a BNPL transaction, the provider deals with all the financials and costs involved in processing the payment: the provider makes the payment on behalf of the shopper, who then must pay back the Buy Now, Pay Later provider.
Essentially, if the customer decides to file a chargeback, it will be at the expense of the provider. However, if the chargeback involves the delivery of a product or if it’s faulty, it may be passed onto the merchant by the BNPL provider.
Consider these points to understand whether BNPL is right for your business:
BNPL services vary slightly from provider, so selecting the one that works best for your business is crucial for getting the most out of it. Here are a few things to consider when choosing a BNPL provider:
As Buy Now, Pay Later grows ever popular, there is a growing number of providers for merchants to choose from. Here are some options for your business:
Known for its smooth integration and user-friendly interface, Klarna is one of the most popular and recognised Buy Now, Pay Later providers. It’s available for merchants online and in-store and offers a wide range of repayment options. It’s also widely available for retailers across the world, servicing stores across Europe, North America, Asia, and Australia.
Initially launched as Afterpay in Australia, this Buy Now, Pay Later provider operates as Clearpay within the UK and EU. Shoppers can purchase using BNPL and, provided they pay the instalments back on time, are not charged any interest fees.
PayPal’s Pay Later features vary slightly between countries, but in the UK, your customers have two months to pay back their loan across three interest-free instalments. For merchants who already have PayPal as an integration on their website, Pay in 3 is included at no extra cost.
One of the newest offerings, Apple Pay Later is the BNPL option from Apple. While it’s currently only available to Apple Pay users in the US, it’s expected to launch across the pond soon too. With research from Statistica showing that Apple Pay is the most-used mobile payment option (69%) in the UK, if launched, Apple Pay Later will be available to a wide demographic who are already payment-savvy.
In the US, Apple Pay Later loans can be easily applied for, viewed, and managed in each shopper’s mobile e-wallet, the Apple Wallet; the integration makes the whole process incredibly seamless for users.
Buy Now, Pay Later seems like an obvious choice for retailers, but what about for your customers? To help you better understand how BNPL affects them, we’ve pulled together a list of key customer considerations that are worth knowing, to save you having to do the research yourself.
The initial soft credit check won’t affect your customer’s credit score. Previously, paying off the BNPL loan instalments wouldn’t affect their score either.
However, from 1st June 2022, Klarna announced that it would start to share information about its customers' BNPL repayments with Experian and TransUnion – two leading consumer credit reference agencies. This is because Buy Now, Pay Later payments are now being considered ‘short-term loans’ that can help give a bigger picture of a consumer’s credit commitment history.
Klarna will report on instalments paid on time and late and unpaid instalments made or expected after the 1st June 2022.
While this data won’t directly impact consumers’ credit scores yet, any loan or mortgage lenders will be able to see their BNPL history, if the BNPL provider was Klarna. Late or unpaid BNPL instalments may then be considered negatively, while instalments paid on time are likely to be positively viewed.
Unfortunately, merchants may encounter problems with delivery and quality control that mean your customer can ask for their money back if they don’t get exactly what they paid for.
Under Section 75 of the Consumer Credit Act 1974, card providers must protect purchases over £100 for free, meaning that your customers can be reimbursed if their goods arrive faulty or don’t turn up at all.
But, Section 75 doesn’t apply to Buy Now, Pay Later purchases as a third-party BNPL provider intervenes with the purchase link between the credit card company and the merchant. This means that customers using BNPL methods aren’t covered by Section 75 and won’t be able to request a refund under Section 75 if their goods arrive in poor condition.
As with any exchange of money, there are always security factors that customers should take note of. For merchants, most of the liability for fraud disputes sits with Buy Now, Pay Later providers. In fact, a Bain report found that 23% of merchants experienced less fraud with BNPL.
But, customer fraud exists: whether it’s scammers using stolen personal information to impersonate innocent victims, or family fraud where children are accidentally racking up purchases on their parent’s credit or debit cards.
To help secure card payments and reduce the likelihood of fraud, the Payment Services Directive (PSD2) brought in the Strong Customer Authentication (SCA) requirement in September 2019. It states that banks must perform checks to verify a customer’s identity for all “customer-initiated” online card or contactless offline transactions in the UK.
For merchants, 3D secure authentication meets SCA-compliant requirements; it involves asking shoppers for two levels of identity authentication when making purchases, like a one-time passcode and card details.
Learn more about the different types of card payment security here.
Here at takepayments, we know a thing or two about accepting payments to help keep your business running smoothly. Whether it’s card machines, online payments, or point-of-sale systems, you’re in the right place.