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What businesses should know about buy now, pay later

Sunday, December 07, 2014

Everything to know about the newest payment option for online consumers

Buy now, pay later (BNPL) emerged in the ecommerce marketplace in 2015. However, it wasn't until the pandemic that customers began to use this payment option with great enthusiasm and regularity. The pandemic drove consumers to utilize e-commerce platforms for all types of purchases, big or small. As such, consumers sought flexible payment options that allowed for payment installments over periods of time.

The idea of having payment terms, for example, making a payment in four installments, gained traction with a more extensive consumer base. Payment became more doable as consumers sought to buy larger types of products (for example, furniture), knowing that they could pay smaller amounts over a more extended period. As a result, U.S. consumers and other online shoppers began to look more into the details of this pay later service and how they could leverage this in the marketplace.

What is buy now, pay later (BNPL)?

BNPL services offer customers a new payment method that differs from debit card options, credit card options or check payments. The BNPL option gives customers the opportunity to make purchases and pay off the cost over a period of time following the initial payment. Usually, the initial installment at the time of purchase is around 25%. At that point, the consumer would agree to make equal payments over a certain time period until payment is received in full. Essentially, BNPL offers a flexible payment option where shoppers can make the total payment in the short term instead of all at once.

BNPL is particularly attractive to newer generations (like Gen Z or millennial consumers) because there are sometimes no late fees (though some do charge for missed payments or renegotiating specific terms of the payment plan). For younger consumers that don't have an extensive credit history, there is increased accessibility in the marketplace and ecommerce platforms. Moreover, younger generations are beginning to establish their financial mobility, and so it is important to offer flexibility and different options than traditional payment methods.

Historically, BNPL required little interest and minimal credit checks, reducing the barrier for a wide array of consumers. However, as of late February 2022, BNPL transactions started appearing on credit reports. It is argued that BNPL data will help customers build their credit, showing that they are reliable in regular payments over time.

BNPL is a business model designed to thrive in the ecommerce space, specifically for online shopping. BNPL providers often see a higher average order value because installment payment plans have a more significant function with products that are priced higher. As consumers become more familiar with this payment option, the buy now option has become more desirable and preferred for certain online consumers. As consumers successfully use this model for payment, there is increased demand to see this payment option integrated at other businesses in the online shopping space.

How BNPL works

BNPL programs don't function uniformly. Every BNPL provider will have its structure and process for working. Financing options can look differently depending on the retailer, so consumers and businesses need to understand the general themes or points of operation when it comes to BNPL financing.

Generally, if you are to utilize a BNPL option, a down payment is made for the purchase. From there, consumers agree to payment terms until the total amount has been paid. Generally, BNPL options are interest free and the payments can be made via debit card, bank account, or credit card. If you choose, autopay can be set up. It is important to recognize that every type of BNPL terms and conditions can be different. Consumers should understand the terms of any payment structure before agreeing to the payment plan.

Unlike making a credit card payment, no interest is accrued on the amount paid. However, the payment plan is clear upfront, and it is expected that the consumer follows the payment timeline outlined. All of the payment details are provided to the consumer at the point of sale so that there aren't any surprises and the consumer knows what to expect. Once the final payment is made, the provider closes out the order. On credit reports, this is reflected as a completed payment that could ultimately increase the customer’s credit score.

What retailers should know

  • BNPL vs. traditional financing and layaway. Point of sale financing differs from BNPL in that it is less flexible and tends to be more expensive for the consumer. Traditional financing usually includes interest charges and requires credit checks for consumers to be eligible. Traditional financing is also not as common; this type of financing is only involved when larger, more expensive items are being sold. When it comes to layaway, layaway payments have been an option for retailers for nearly a century. The primary difference is that retail stores will only provide the products once payment has been received in full. While no longer very popular, layaway does have some traction with consumers in that there is no interest accrued in a layaway financing option.
  • When will I get paid with BNPL? Retailers that partner with BNPL service providers will get paid within three business days, regardless of the payment structure selected by the consumer. The business model functions because the BNPL service provider covers the cost of the product on behalf of the consumer while the consumer makes payments directly to the BNPL service provider. While there may be a small fee for the use of the BNPL service or platform, they are generally paid in full within several days. Payment plans and installments are all managed with the BNPL service.
  • What BNPL fees do retailers pay? For retailers to offer their consumers the option for BNPL, there may be a small fee that they can pay to the provider. The fee varies for each service, but the amount can begin around 6% + .30 per transaction. While the fees can seem high for retailers, these types of transactions are quite large and will still help the retailer meet its bottom line. BNPL may bring in consumers who would otherwise not purchase the desired products with one lump sum.
  • BNPL and online marketplaces. To offer BNPL at your online store, you will need a website that can offer ecommerce integration with the BNPL platform. Once the service contract has been agreed to, businesses of all sizes (including small businesses) can install the BNPL integration and have peace of mind that consumers will have this option for payment at check-out. The integration will provide consumers with the option of a traditional payment method or the option for BNPL. Should they choose BNPL, their payment process will be arranged with the third-party BNPL service provider.

What customers should know

One thing is for sure—the BNPL trend has just begun and will continue to be an option that online consumers can consider when making payment. When considering adopting the BNPL business model in your practice as a consumer, there are a few things to remember.

  • Splitting up payments can be a good thing. Do you want to purchase something that you would rather pay through installments but don't want to take out a personal loan? Or, do you like to budget and pay a set amount for products over a given time period? BNPL might be for you. Repayment options are popular for consumers who want the flexibility to pay when it’s convenient. Marketplaces are beginning to recognize that this can vary, so the option for BNPL inherently gives consumers more power over how payment is made and what works best for their lifestyle and budget.
  • Fees and interest. Unlike credit cards, loans, and other financing types with lenders, BNPL is a low-risk option for payment. Checkout becomes easy; you can decide what type of payment structure you would like to use and review the regulations of these decisions immediately.
  • Importance of timely payments. Again, with the recent change of BNPL transactions being recorded with credit bureaus and credit reports, it is very important that customers make their BNPL payments on-time so that they remain in good standing with other loan servicers and in maintaining a good credit score.

Moving forward

As U.S. consumers continue to diversify in payment methods, retailers can respond by integrating new business models, including the BNPL approach. BNPL can work for retailers and consumers alike; retailers can receive full payment for their products while consumers can spread out their payments of a larger purchase within a more reasonable timeline. BNPL has filled a gap for consumers who would like to make larger purchases but need more time to do so.


Next steps

Are you ready to offer BNPL as part of the financing option for your consumers? Are you ready to integrate new payment trends at your place of business?

Heartland is ready to help.

Heartland helps nearly 1,000,000 entrepreneurs make and move money, manage employees and engage customers with human-centered technology solutions that allow them to rise above the daily grind and lead their businesses into a brighter future. Learn more at heartland.us