What is Buy Now, Pay Later (BNPL)? How it works for small businesses

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What is Buy Now, Pay Later (BNPL)? How it works for small businesses

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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.

What is Buy Now, Pay Later?

Buy Now, Pay Later is a loan-like 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.

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.

How does Buy Now, Pay Later work?

Here’s a quick overview of how Buy Now, Pay Later works for ecommerce transactions:

1. A customer goes to checkout – After filling their basket, the customer goes to the checkout page to complete their purchase, just like if they were using their credit or debit card to pay.

2. The customer is shown BNPL as their payment option – The customer is given the option to choose Buy Now, Pay Later to make a purchase. This payment method is often offered by a third-party provider partnering with retailers and e-commerce platforms.Once the customer selects Buy Now, Pay Later, they proceed with the purchase as usual. They fill out their personal information, such as name and shipping details, and proceed to the payment page.

3. The BNPL lender runs a soft credit check – The customer selects BNPL and fills out their personal information, such as name and shipping address. Using these details, the lender runs a soft credit check on the customer to understand their credit history and the likelihood that they will pay back the cost. These soft checks don’t affect the customer’s credit score.

4. The customer selects their repayment plan – If they pass the soft check, the customer will agree to specific payment terms offered by the Buy Now, Pay Later provider. These terms could include options like interest-free instalment plans, where the total amount is divided into equal payments over a specified period, typically weekly or monthly. Or, some providers may offer them a choice to pay the total amount at a later date.

5. The Buy Now, Pay Later provider charges the merchant – BNPL providers typically receive a fixed percentage of the transaction, which the merchant must pay for.

6. The customer pays back the BNPL loan – The customer may receive reminders about their upcoming payment due dates by email or text message. When it's time to make a payment, the customer must pay the amount directly to the Buy Now, Pay Later provider through their website or app. The payment can be made through various methods, including debit or credit card, direct bank transfer, or automatic deduction from a linked account. The loan is usually interest-free if paid back in the agreed instalments, but customers may incur interest charges if they are late to repay.

What are the potential benefits of Buy Now, Pay Later for businesses?

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:

1. Increased sales

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.

2. Attracts new customers

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.

3. Enhanced customer experience

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.

4. Supports customer retention

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.

5. Improved conversion rates

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.

What are the potential drawbacks of Buy Now, Pay Later?

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:

1. Integration can be difficult

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.

2. Provider fees can add up

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.

3. Can increase return rate

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.

4. May encourage consumer debt

This 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. In fact, the Centre for Financial Capability recently reported that around one-quarter of Brits who have used BNPL have missed one or more repayments.

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.

Some firms might be wary that the negative connotations that have started to surround BNPL around consumer debt could impact their own brand image. While it may be unrelated, we’ve seen big-name brands, like Natwest and Apple, shut down their BNPL offerings shortly after their initial launch.

5. UK government plans for regulation

With the Buy Now, Pay Later market expected to quadruple in size in 2024 compared to 2020, there have been increasing calls for regulations to be brought in to mitigate the chances of consumer debt growing.

The UK government initially announced plans to regulate Buy Now, Pay Later products in 2021, with two consultations in 2022 and 2023. While the government is still consulting on draft legislation, it’s expected that BNPL could be brought under the Financial Conduct Authority’s (FCA) regulation.

This could pose significant changes, such as BNPL providers needing to be authorised by the FCA and complying with various consumer protection rules. In turn, this could limit the number of available providers, reduce competition, and potentially lead to higher fees for businesses that want to integrate BNPL as a payment method. It might also result in changes to the way BNPL schemes work and how merchants have implemented them.

What fees are there for merchants who offer Buy Now, Pay Later?

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.

How does Buy Now, Pay Later affect chargebacks?

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.

Is Buy Now, Pay Later right for your business?

Consider these points to understand whether BNPL is right for your business:

  • Your product – The type of product or service that you sell can have a huge impact on which BNPL is right for you. If most of your products are low cost, customers might not get the value by purchasing using BNPL.
  • Your customer base – Review your target audience and customer demographic to understand what BNPL features could be more important to them. For instance, two-thirds of BNPL users under the age of 45 want to use Buy Now, Pay Later to strengthen their credit score.

How to choose a Buy Now, Pay Later provider?

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:

  • Provider repayment options – Examine the repayment options offered by different available providers. Do they provide flexible instalment plans, interest-free periods, or deferred payment options? If your customers’ average order value is quite high, having the option to offer more instalment options over a longer period of time could be more beneficial for your customers.
  • Provider credit limits – Some BNPL providers will also set different maximum limits on the amount that they lend to customers. This also depends on your business’s pricing strategy and how much your customers spend in a single order.
  • Provider customer experience – As your BNPL provider will essentially become part of your business’s customer transaction journey, how they operate and their ease of use may have an impact on your brand’s overall reputation. Research user reviews and ratings to ensure the provider offers a smooth and user-friendly experience for your customers.
  • Provider customer support – Once the customer has purchased using BNPL, it’s up to the provider to handle the repayments and they must be made using the provider’s own platform. Look for one with excellent customer support and a reliable infrastructure to ensure a seamless payment experience for both you and your customers.

What are the most popular Buy Now, Pay Later providers?

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:

1. Klarna

  • Available in Europe, Asia, North America, and Australia.
  • Klarna Pay in 30 Days lets shoppers defer payment without having to pay any interest
  • Klarna Instalments gives customers the choice to pay in three interest-free instalments
  • Klarna Financing allows shoppers to repay their loan in up to 36 months

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.

2. Clearpay

  • Available in the UK, North America, Canada, Australia, and New Zealand (known outside of the UK and EU as Afterpay)
  • Customers can pay back their loan in four interest-free instalments across six weeks

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.

3. PayPal Pay Later

  • Available in the UK, US, Australia, France, Germany, Italy, and Spain
  • PayPay Pay in 3 lets customers pay back their loan in three interest-free instalments over two months

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.

Buy Now, Pay Later for your customers

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.

Does Buy Now, Pay Later affect a customer’s credit score?

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.

Are customers protected when paying with Buy Now, Pay Later?

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.

Does Buy Now, Pay Later fraud exist?

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.

Keep your customers happy with payment solutions from takepayments

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.

Get in touch with our experts on 08082 393294 to see how we can help, or visit our blog for information about payments, the latest industry news, and more.

John Clark Min

John Clark

Product Manager

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