Published On: November 7, 2023
  • BNPL is a payment method where customers can defer purchases and make equal installments.
  • Customers benefit, and merchants see reduced cart abandonment, enhanced customer retention, and quick settlements.
  • BNPL drives business growth in businesses, but everyone should be aware of potential risks associated.

How Does “Buy Now, Pay Later” (BNPL) Work?

Buy Now Pay Later (BNPL) is a short-term loan that allows consumers to defer payment for their purchases to a later date by paying in installments. The instalment payments are structured to be equal in amount and are scheduled ahead of time, with the first payment due at checkout. The BNPL model involves two main parties: the merchant who sells the product and the BNPL provider who offers the financing. The BNPL service is available to customers at checkout and is provided through the merchant’s partnership with the BNPL provider.

Customers can pay for their purchase in installments at checkout using a “buy now, pay later” method. To do so, the customer is redirected to the “buy now, pay later” provider’s website or app, where they can either create a new account or log into an existing one. At this point, they can either accept or decline the repayment plan’s terms, after which they can return to the merchant site’s checkout flow.

To use the Buy Now Pay Later service, the customer is required to fill out a short online application form either on the merchant’s website or on the BNPL provider’s site. The customer must provide basic personal information and select a payment method, such as a debit or credit card, from which installments will be withdrawn. A soft credit check that does not affect the customer’s credit rating may also be performed. If the customer is approved, they can start using the BNPL service on multiple purchases and on various retail sites that are partnered with the same BNPL provider.

How Does BNPL Benefit Customers?

Users of BNPL services are typically younger (18-34 years) and non-credit cardholders and belong to either the mass market or mass affluent groups. BNPL services offer various benefits to consumers. It makes budgeting easier with predictable payment streams and budgeting tools.

The BNPL payment option is a convenient way to pay for purchases. It is integrated into the e-commerce platform and consumer application, and the approval process usually takes only a few minutes, compared to the days it takes for credit card approvals. This payment method allows consumers to afford upfront payments. For Canadians who do not have access to traditional forms of credit, such as credit cards or personal lines of credit, or those with lower incomes, BNPL makes it possible for them to buy things that would otherwise be out of their budget.

Some BNPL providers in the United States have started offering programs for customers with little or no credit or poor credit history to send their repayment history to a credit agency. This helps to build their credit file and improve their credit score.

How Does BNPL Benefit Merchants?

BNPL services offer several benefits to merchants.

Reduced Cart Abandonment

One key advantage is a reduced cart abandonment rate. Studies conducted by BNPL providers have shown that merchants who offer BNPL experience a lower cart abandonment rate, resulting in increased sales.

Enhanced Customer Retention

Another significant benefit for merchants is enhanced customer retention. BNPL provides a predictable repayment schedule that can make consumer goods more accessible. This predictability encourages customers to purchase, increasing purchase propensity and transaction value.

Quick Settlements, Reduced Risk

One of the key benefits for merchants is that BNPL providers take on the risks associated with chargebacks and fraud. If a customer disputes a transaction or there is fraudulent activity, it’s the BNPL provider’s responsibility to address these issues, not the merchants. This reduces the financial risk for businesses and allows them to focus on their core operations.

Additionally, BNPL enables merchants to receive payment quickly. When customers choose the BNPL option, they commit to paying in installments, but the merchant typically receives the full purchase amount upfront from the BNPL provider. This can improve cash flow and help businesses maintain a healthy financial position.

Staying Competitive

In a competitive marketplace, offering BNPL as a payment option can help merchants maintain an edge. This payment method has gained popularity among younger consumers, making it essential for businesses to include it in their payment options to stay competitive.

Direct Marketing and Seamless Checkout

BNPL providers offer direct marketing capabilities, allowing them to promote product offers directly to consumers. Furthermore, the seamless API integration capabilities of BNPL services enable merchants to provide customers with a smooth and hassle-free checkout experience.

Current Adoption

The adoption of BNPL among merchants is on the rise. A 2022 survey conducted by RFi found that 8% of merchants accept BNPL as a payment option.

Growing Interest

There is also a significant interest in BNPL among merchants who have not yet incorporated it into their payment methods. The same RFi survey revealed that 48% of merchants who do not currently offer BNPL expressed interest in doing so soon.

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Potential Risks of BNPL For Consumers

Limited Qualification Standards

Unlike credit card providers, BNPL providers are not obligated to qualify a consumer’s ability to repay loans. Most BNPL providers only perform a soft credit check during the registration process, so consumers with bad or no credit might easily be approved. If they use multiple BNPL services, these consumers can potentially get into an unmanageable debt load.

A U.S. consumer research study conducted among BNPL users found that 74% of those surveyed made all their BNPL payments on time, 14% missed a payment once, and 12% missed a payment more than once.

Increased BNPL Usage

According to the latest MNP Consumer Debt Index report, almost 58% of Canadians plan to borrow more money before the end of this year. The COVID-19 pandemic has led to an increase in BNPL purchases due to the rise in online shopping. This trend is expected to continue into the 2021 holiday shopping season. However, consumers should be aware that the availability of BNPL credit during checkout could encourage impulse buying.

Challenges of Multiple Purchases

A recent study of BNPL users in the U.S. found that 16% made five or more purchases using BNPL in an average month. Users who make multiple purchases using different BNPL providers might face difficulty in managing and keeping track of their purchases, leading to late and missed payment fees, which is a potential risk for consumers.

Beyond Immediate Consequences

It’s important to consider the potential risks of using BNPL services beyond immediate financial consequences. Typically, BNPL users are younger, and if they face financial difficulties, it might affect their ability to obtain credit or certain types of employment in the future.

Credit Reporting Practices

Some BNPL providers like Sezzle don’t report their customers’ payment activities to credit bureaus, while others like PayBright, Afterpay, and Affirm do. Customers who default on loans or make late payments will affect their credit scores, decreasing their chances of getting future loans.

Potential Risks of BNPL For Merchants

While accepting BNPL customer payments can benefit merchants, it also poses certain risks.

Coping with Increased Transaction Costs and Customer Choices

Merchants often pay a transaction cost between 2% to 8% of the purchase price, higher than the standard 1% to 3% cost of credit or debit card transactions. Therefore, merchants must increase their sales volume to offset the added cost. However, offering BNPL as a payment option may also prompt customers to switch from lower-cost payment options such as credit, debit, and prepaid cards, potentially harming the merchant’s bottom line.

Merchants should carefully assess whether a BNPL strategy aligns with their business and determine the minimum transaction value that would justify offering BNPL as a payment option. The primary goal of providing BNPL as a payment option is to attract new customers. However, merchants need to be aware that BNPL providers may limit the number of concurrent loans a consumer can have, impacting the ability to maintain a recurring relationship with the customer.

Balancing Risk and Reward with BNPL Service

Merchants should consider the risk of reaching a point where the cost of accepting BNPL exceeds the value. However, once BNPL becomes widely used, discontinuing it may not be possible for merchants even if the cost outweighs the benefit. Regulatory intervention may be necessary to decrease the cost. Additionally, BNPL services may pose a risk to customer relationships regarding product returns. While BNPL purchases have a lower return rate, the returns process can be cumbersome for the customer. In some cases, BNPL providers may hold the customer liable for the total purchase cost, even after the item has been returned.

Does Your Business Accommodate BNPL?

In the ever-evolving landscape of retail, staying ahead is key. Buy Now, Pay Later is not just a trend; it’s a transformative tool that can elevate your business.

By offering BNPL, you unlock the door to increased revenue, reduced cart abandonment, enhanced customer retention, and faster settlements. As consumers increasingly seek convenience and flexibility in their payment options, BNPL can be a great solution. It also means expanding your customer base and solidifying your competitive edge.

Speak to one of our advisors to upgrade your payment processing options. Call us at 1.866.286.7787. Alternatively, you can  get a quote.

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