How does buy now, pay later work for merchants?

Buy now, pay later (BNPL) has been around for a while, but it’s only recently - partly thanks to a rise in financial uncertainty and an online shopping boom during lockdown - that it’s started to grow in popularity as a credit option for consumers.

And it’s seen serious growth: according to Statista, global use of BNPL increased by a staggering 400% between 2019 and 2021 and now accounts for 3% of ecommerce market share. What’s more, eight out of the top ten BNPL markets are located in Northwestern Europe.  

What this means for merchants is that you can’t afford to miss offering this rapidly growing finance option to your customer - if you don’t, your competition will.

And while there’s an obvious advantage to consumers in the ability to spread out the cost of high-ticket items, there are numerous benefits of BNPL for merchants in the form of higher sales, boosted loyalty, and the ability to attract a wider range of customers.

Below, we explain buy now, pay later for merchants, explore some of the best known BNPL providers, and detail the key benefits of this alternative payment method.

What is buy now, pay later (BNPL)?

Buy now, pay later is a type of finance that allows consumers to purchase goods and services and pay for them at a later date. Customers can buy items that they may not be able to afford up front and pay what they owe in installments over an agreed period of time.

BNPL options are usually offered by merchants in partnership with a BNPL provider, which handles the financing and payment processing for the purchase.

How does buy now, pay later work for merchants?

After signing a contract with a BNPL provider, you can integrate them into your checkout. Where you choose to advertise their service in the customer journey is up to you, but advertising it on your product pages - rather than as a surprise at the point of purchase - can help to encourage sales.  

When your customer chooses to buy now, pay later, your BNPL provider will run a soft credit check to establish whether they can actually pay back the loan. These checks are usually conducted on the checkout page, so there’s no need for your customer to be taken on to a third party site.

Once approved, your provider pays you the full amount that your customer owes at the time of purchase. The customer then pays the provider an initial amount and the rest in installments over an agreed period of time, which can vary depending on their means and the provider’s terms.

In most cases, the service is interest free for customers. As the merchant, you simply pay a fee for every transaction completed, typically in the region of 2-8% of the sale cost. Using a BNPL service generally won’t affect your customers’ credit score, but providers will charge them a late payment fee if they miss an instalment.  

Learn more: How to prevent BNPL fraud

Popular BNPL services

There’s a huge number of BNPL services to choose from. Although all operate on the same basic principle, they can have very different terms and conditions, affecting the frequency of repayments, merchant fees, late payment fees, and the types of payments they’ll accept.

Here are some of the best BNPL services for merchants:

• Klarna - serving more than 147 million global shoppers and 450k retail partners, Klarna is the Swedish payment service provider that offers customers the option to pay for their purchases in three equal, interest-free installments. It also allows you to offer your customers a ‘Pay in 30 days’ option and 36 months financing.
• Tamara - one of the leading BNPL providers in MENA, used by thousands of leading retailers across the region to offer flexible finance options to their customers.
• Afterpay - an Australian company that allows customers to pay for their purchases in four interest-free installments over six weeks. Afterpay charges merchants a percentage of each transaction + 30 cents (operates under Clearpay in Europe).
• Zip (formerly QuadPay) - another Australian BNPL service that allows customers to pay for their purchases in four interest-free installments, Zip charges a merchant fee based on the interest fee period you offer your customers. Transaction fees are limited to 30 cents per sale, which gets cheaper the more customers that use the service.
• Laybuy - a New Zealand-based BNPL service that allows customers to pay for their purchases in six interest-free installments. Laybuy also gives you access to a Merchant Dashboard that you can use to analyze sales performance and shopper behavior.
• Zebit - a US-based service that offers no-credit-needed financing options for customers and the ability for your customers to pay over six months. Once an order is accepted (subject to an evaluation and underwritten at checkout) your customer pays between 20% and 35% upfront, and the remainder in installments as often as they get paid.
• PayPal - although not known predominantly as a BNPL provider, PayPal offers its own interest free installment loan service called Pay in 4. It’s available for purchases between $30 and $1,500 and doesn’t charge late fees.

When choosing a BNPL provider, consider which is the best fit for both your needs and your customers’. Sure, popularity is one useful indicator, but check whether they’re used to working with businesses that operate in your sector and that process a similar volume of transactions.

You should also make sure to compare the fees you’ll be charged by each provider to ensure you’re getting a good deal, and find out whether any other useful services are included. For example, Klarna offers an AI-powered marketing service to businesses with +£3m in sales that delivers shoppable online content.

Finally, from the consumer perspective, do they offer your customers plenty of choice and flexibility? And are their terms suitable for customers in your target market? For example, younger consumers may prefer longer repayment terms with lower individual installments.

What are the benefits of BNPL for merchants?

By making your products more accessible to a wider range of consumers, offering BNPL can be a great way to attract and retain customers, and grow your business. Below, we detail some of the other key benefits:

Increase your sales

BNPL options allow your customers to make purchases they may not be able to afford upfront. By giving them the flexibility to pay for goods in installments, you can improve the chances of a successful sale and increase the number of sales your business is making overall. Simply by offering convenience, and a less intimidating overall basket cost, you may also see a reduction in abandoned carts.

Learn more: How to avoid cart abandonment during peak season

Increase your average order value

BNPL can also help merchants to increase their average order value. As customers can pay in affordable chunks, they’re more likely to add higher value items to their basket and to add more items overall.

Improve your cash flow

By increasing both the number of sales you’re making and the average value of each sale, you’re getting a lot more cash coming into your business at once, which is great for ensuring a healthy cash flow.

Boost customer loyalty

Customers are more likely to make repeat purchases with your business if they know you offer flexible payment options, which is a great way to build long-term brand loyalty. When customers are comparing products on two different websites, offering BNPL could be the reason they choose you over your competitor.

Attract younger customers

According to Statista, users of BNPL are predominantly millennials and Gen Z. Younger consumers are the most likely to shop online but typically have less accumulated wealth than older generations. They are also less likely to have a credit card, which could otherwise perform a similar function. By giving these customers the option to spread their payments out over a more affordable period, you’ll be able to attract younger customers.

Use it as a marketing tool

You can use BNPL as a marketing tool by promoting it as a financing option to potential customers. Broadcast your use of a BNPL provider in any promotional material or online advertising you put out. It’s also powerful when featured prominently on your product pages to encourage wavering customers.  

Reduce your risk of chargebacks and fraud

Since your BNPL provider handles the financing and payment processing, you can reduce the risk of costly chargebacks. Your BNPL provider also takes care of the credit check and often assumes all credit and fraud risk for every transaction.

Are there any risks to BNPL?

At the moment, there are no massive risks to merchants of using BNPL. Of course, your customers could still default on payments, and you will have to account for the additional fees of using the service in your budget, but this cost is more than likely to pay for itself when you take into account the benefits.

There is likely to be more regulation in the BNPL space in the next few years, which is not a risk as such but something for merchants to be mindful of and to stay up-to-date with.

Accept more payment methods with Checkout.com

If you are looking to offer BNPL options such as save now, buy later to your customers - and serve the right options for different regions - Checkout.com can help.

Whatever you sell, and whoever your customers are, Checkout.com’s Unified Payments API gives your business access to the world’s most popular payment methods, digital wallets, and global card schemes.

We can help you find the local payment methods popular with customers in the regions you operate in. That means you can find just the right options for your needs, make your customers happy, and boost sales.

Find out more and check out our full range of payment methods.