Everything you need to know about Buy Now Pay Later (BNPL)

There are times where consumers want to purchase a product or service but instead of paying for it in full and on the spot, they prefer to divide the total cost into a series of instalments. This is where Buy Now Pay Later (also known as BNPL) payment solutions come into play. Research by Statista uncovers that BNPL transactions are projected to soar worldwide by over US$450 billion between 2021 and 2026. Therefore, integrating BNPL into your payment mix can increase the chances for your business to engage more shoppers and maximise revenue.

In this article, we explore what BNPL is, how it works, how popular it is, its benefits, and if it’s right for your business. Without further ado, let’s dive into it.

What is BNPL?

BNPL is a type of financing that enables consumers to shop for goods and services and pay later or in instalments. Oftentimes, these payments carry low or zero interest rates and other fees, yet terms may vary from one BNPL provider to another. Essentially, consumers using BNPL can split purchases into several equal payments, with the first due at checkout. The remaining balance is billed to their credit/debit card or bank account until the price of the item bought is fully paid.

BNPL is an alternative payment method to credit and debit cards that can cater to several payment channels and types, such as in-person and online. It’s partly because of the convenience and ease that BNPL provides that is viewed as a consumer-friendly payment option that’s on the rise (more of this below).

PayPal’s Pay Later is as a great example of an interest-free payment solution that fosters increased spending power. This is because it offers shoppers the leeway to defer the payment by spreading out the value of their purchased product or service across multiple instalments (Read our article and find out everything you need to know about PayPal Pay Later solution in the UK, Pay in 3 in our article).

How BNPL works?

Merchants need to sign a contract with a BNPL provider to integrate BNPL services into their payment mix and give customers an additional payment option to enhance their shopping journey. This can be done ascertaining that merchants have researched and assessed provider offering, factoring in payment terms, fees, integration options with the merchant's eCommerce platform, and customer support.

On a customer-facing level, there are varied BNPL services depending on the provider. However, the general process of completing a transaction with this payment method involves the following steps:

1. At checkout, the shopper selects the BNPL payment option.
2. The BNPL provider runs a credit check to confirm that the consumer can repay the payment amount. Such checks are normally performed on the merchant’s payment page in a matter of seconds, so there’s no need for your customer to be redirected on to a third-party website.
3. Upon authorisation, the customer can choose a repayment plan that suits their needs, such as breaking down the cost into instalments over a fixed duration. Then, they receive a payment schedule indicating the instalment amounts and due dates.
4. Once the payment plan is established, the customer is expected to pay the initial amount), while the provider pays the merchant the total amount of the customer's purchase that the customer owes at the time of sale. Customers can set up automatic payments for the remainder of instalments – whether weekly, bi-weekly, or monthly – ensuring timely and hassle-free transactions over the agreed-upon repayment period.

How popular is BNPL and what to consider when offering it?

As explored above, BNPL is set for exponential growth in the years to come and on a global scale. This mean that you should take into account the region you’re targeting when deciding to offer this payment option at checkout.

While BNPL represents 5% of the global market share, Europe appears to be holding the reins in BNPL adoption, followed by Australia, New Zealand, and Canada. In fact, Sweden registered the highest share of eCommerce transactions made via such services with 24% in 2022 alone. This is closely accompanied by Germany (23%), Norway (18%), Belgium (14%) and the Netherlands (13%). Research by Finder also uncovers that UK consumers are also demonstrating their affinity to BNPL payment method, as 17 million locals tapped into it to shop online in 2022.

Demographics can be another indicator for businesses to engage the right audience and ensure higher conversions at checkout along with maximised profitability. emerchantpay’s latest whitepaper, ‘The Global Payments Outlook’ reveals that Millennials are the age group with the highest preference in BNPL services across the UK – standing at 54%. Next generation in the list are Gen Z (50%), with Gen X (37%), and Baby Boomers (23%) coming next.

Another factor to consider about BNPL services is your business type and whether it can accommodate this payment option. If you’re a retailer selling high-value items – i.e., goods for which people are less inclined to pay the entire value upfront, such as furniture, appliances, etc. – then BNPL makes total sense for expanding your market. Conducting your market research, identifying your target audience, and exploring the BNPL solution that’s most advantageous for your business needs is imperative to boost your conversions and profitability.

What are the benefits of BNPL?

The growing popularity of BNPL payments presents a variety of benefits for any merchant offering this payment type to their customers. These include, yet are not limited to, the following:

Benefits of BNPL for consumers

• Financial flexibility – It can be a great comfort for consumers to know they can break down the sum of their payments into manageable increments, thereby managing their budget more efficiently. Not only can this encourage higher spending, but it can also increase the chances consumers want to buy from you again.
• Immediate ownership of purchase – With BNPL, customers can get the product or services they bought straight away, even if they didn’t pay the full amount upfront. This is particularly useful for more retailers selling larger value items and higher ticket sizes.
• Interest-free solution – There are some BNPL services that offer interest-free periods. This can be enticing for cost-conscious consumers who want to have the freedom to pay off their purchases without incurring additional charges.
• Easy and speedy approval – The instant approval of BNPL at checkout, which happens upon successful credit checks. Not only does this make it a faster process, but it is also accessible to a wider range of age groups with different budgets that can drive financial inclusion for those who can financially meet the BNPL standards.
• Transparency – BNPL platforms provide a clear breakdown of payment schedules, due dates, and remaining balances, allowing customers to remain organised and in control of their finances.

Benefits of BNPL for merchants

• Higher revenue – Accepting BNPL at checkout can encourage consumers to buy more expensive goods. This way, merchants are better placed to maximise their sales volumes and profitability. In fact, survey published on PYMNTS reveals that BNPL solutions can raise the chances of a sale by up to 30%, which can boost the profitability and conversions for businesses accepting this payment type.
• Enhance customer loyalty and minimise checkout abandonment – Consumers are more likely to check out in your store if you give them the ease to shop now but pay later. Depending on the demographic you're serving and the products you're selling, , BNPL may decrease your cart abandonment rates for your online store while help website visitors convert into returning customers. This, can in turn,help you establish long-term brand loyalty.
• Amplify your customer base – As explained earlier, BNPL services are appealing to a wide range of customers, with younger demographics such as Millennials and Gen Z exhibiting the most interest. Therefore, offering flexible payment solutions to cater to all sorts of consumers is vital. Another study carried out by PYMNTS identified that almost two-thirds (60%) of consumers acknowledge BNPL as a payment option even though they haven’t used it to make a purchase, testifying to the strong potential for BNPL to thrive.
• Minimise the risk of chargebacks – Since it is the BNPL provider who, on most instances, deals with the financing and payment processing, merchants can mitigate the risk of fraudulent transactions or chargebacks (learn all you need to know about chargebacks in our article). It should be noted, however, that chargebacks can still occur for issues such delivery or quality of the product. Merchants should work closely with their payment service provider to ensure they have a robust chargeback management strategy in place to mitigate the risk of transaction disputes.
• Increased conversions with a single integration for certain BNPL offerings – Some BNPL solutions, such as PayPal's, are integrated into the user journey. This means that the customer doesn't need to sign up for an additional account, which can make the option more enticing for them and enhance a merchant's conversion rates.

Are there any disadvantages to BNPL?

While BNPL offers multiple benefits, consumers need to use it responsible use to ensure a positive shopping and payment experience. From a customer’s point of view, budgeting is crucial when deciding to go for a BNPL service. In fact, customers should consider their financial circumstances and make sure they can meet the payment requirements before committing to a BNPL plan. Moreover, late or missed payments can affect the credit score of consumers.

To make an informed buying decision, it’s equally important for customers to do their due diligence in understanding the terms of BNPL providers and whether there are any costs involved. Interest-free repayments tend to apply to short-term loans where customers pay the provider back in 30 days or over three to four instalments. If shoppers want to spread the cost over a longer period of time, then they can be possibly charged from that point onwards.

Timely repayments are also a necessity and customers should avoid skipping or missing a payment, as it can lead to fees or negative impacts on their credit score.

Is BNPL right for your business?

While BNPL can help you boost sales and grow your revenue, it may not necessarily be suitable for every business. Below we outline what to consider when identifying if this payment solution is aligned with your goals.

In terms of integration, it’s best to evaluate the compatibility of BNPL platforms with your existing eCommerce infrastructure and payment gateway. Another parameter to keep in mind is the fees and costs you may incur depending on the BNPL provider you choose to partner with. That being said, understanding the expenses attached to the BNPL offering is paramount. These charges may encompass transaction fees or other fees related to sharing revenue with the provider, and more.

It’s also crucial to study the preferences of your target consumers. If your customers are likely to favour BNPL, it could be an invaluable addition to your payment strategy.

How emerchantpay can help

BNPL has emerged as a preferred alternative payment method for consumers, as it provides them with the ease and flexibility to better manage their expenses. At the same time, offering BNPL services can help merchants extend their market reach while open up new avenues of driving sales and revenue.

At emerchantpay, we take pride in our global payment solution that offers a wealth of features. These include global acquiring, alternative payment methods, fraud and risk management and many more. Our experienced and knowledgeable team of payment specialists are here to give you strategic support in optimising your setup. This way, you can start accepting BNPL and other popular payment options across channels, thereby providing your customers with a frictionless and safe payment flow.