If you're a merchant curious about the Buy Now, Pay Later (BNPL) system, then you're at the right place.
Although installment payments have been in existence for some time, the contemporary iteration, referred to as Buy Now, Pay Later is rapidly gaining traction across various platforms.
There is a projection that the BNPL users will be more than 59 million this year. This fact, coupled with Apple's foray into the BNPL market, prompts one to question the suitability of BNPL in the e-commerce market and general commercial landscape.
So, what exactly is BNPL? In this article, we will explain the concept of the BNPL model and everything you need to know about it. Let's explore.
What Is Buy Now, Pay Later (BNPL)?
Buy Now, Pay Later is a type of installment financing, in which an initial payment is required at the time of purchase, and subsequent payments are distributed/spread over gradually over a specified duration. The remaining balance will be charged to the buyer’s debit or credit card at a predetermined interval (e.g., every two weeks) until it is completely repaid.
The "buy now, pay later" model enables customers to defer the payment of their purchases, as against making full payment for the purchase price immediately. This can be an invaluable resource for consumers who are attempting to stabilize their finances amidst a recession or who desire to make a substantial purchase but lack sufficient funds.
Despite the growing popularity of BNPL and other deferred payment methods, it is advisable to consider the potential impact of this payment structure on cash flow and point-of-sale (POS) systems prior to finalizing any purchases.
In the following section, we will elaborate on the numerous BNPL plans and the buy-now, pay-later procedure.
Types of Buy Now, Pay Later Loans
Generally, BNPL loans may or may not be interest-bearing. A comparative analysis of their operational mechanisms will ascertain which one offers greater advantages to businesses and consumers.
So, based on the aforementioned facts, the two types of BNPL loans are explained below.
1. Baked-in-interest BNPL loans
Using these instant loans, the client is able to complete the transaction promptly, as the interest rates are comparable to those of credit cards. Occasionally, these businesses may offer promotional interest-free periods analogous to those on new credit cards in an attempt to entice new customers to "take the plunge."
2. Interest-Free BNPL Loans
While these loans may appear extremely attractive to the average consumer, they are precisely the opposite for a business proprietor. The retailer reimburses the third-party lending company a fee in lieu of the consumer paying interest on the loan. In this manner, the merchant is able to charge customers for the convenience of using the buy now, pay later option.
How Buy Now, Pay Later Works
Diverse businesses operating in the BNPL sector employ a broad spectrum of payment models, each governed by its own regulations as to terms, conditions, and interest rates. However, BNPL users continue to receive a consistent experience, as the fundamental procedure remains unchanged despite these variations.
When consumers are prepared to complete their purchases and reach the checkout page, they may select the "Buy Now, Pay Later" alternative to initiate the transaction. Upon being granted authorization, patrons are typically required to make a nominal deposit amounting to around 25% of the total cost of the item they have chosen.
After the initial down payment, users obtain a loan to cover the remaining balance, which they agree to repay in a specified number of installments that they customize to reflect the total cost of the purchase.
When making BNPL payments, customers are presented with several payment alternatives, such as pre-dated cheques, debit cards, or automatic withdrawals from their accounts.
What are the benefits of BNPL for Merchants?
Accepting BNPL payments, which are gaining in popularity, provides merchants with a number of benefits. The following is a non-exhaustive summary:
1. Income augmentation
By accepting BNPL at the register, consumers may be encouraged to spend more. Businesses have a greater opportunity to increase their sales and profits by adopting this strategy. In fact, a survey published on PYMNTS indicates that companies that accept BNPL payments can increase conversions and profitability by up to 30% by implementing these solutions.
2. Increase customer loyalty and decrease cart abandonment
Customers who are offered the option to purchase now and pay later are more inclined to finalize their purchases at your establishment. By tailoring BNPL to the products offered and the target audience, online retailers can potentially enhance conversion rates and reduce cart abandonment rates.
3. Increase your customer base
BNPL services appeal to a wide range of consumers, although younger generations such as Millennials and Gen Z exhibit the greatest interest.
Consequently, it is imperative to offer a diverse selection of payment methods in order to cater to various consumer segments.
4. Minimize the likelihood of chargebacks
Given that the BNPL providers manage the financing and payment processing, merchants can minimize the probability of fraudulent transactions or chargebacks.
5. Conversion rates for specific BNPL products are increased through a single integration
There are BNPL solutions, such as PayPal's, that are integrated into the user experience. The elimination of the requirement for the consumer to create an additional account may make the BNPL option more appealing to the consumer; as such, this increases the conversion rates of the merchant.
Pros and Cons of Buy now pay later
Although offering BNPL options can be costly for retailers, it is especially beneficial to consumers with limited funds for purchases during difficult economic times.
In addition to credit card processing fees and other charges, numerous reputable BNPL companies like Affirm and Klarna, impose additional charges ranging from 2% to 6%.
So, let's explore the several pros and cons of Buy Now, Pay Later.
Pros
- Numerous advantages are associated with the utilization of BNPL services, making them very attractive to the consumer.
- Structured installment-based payment arrangements facilitate a methodical approach to bill payment, thereby encouraging financial discipline.
- BNPL also enables individuals to promptly fulfill their needs without the requirement to make full upfront payments. Furthermore, the attractiveness of low-interest or no-interest loans renders this financial paradigm an economically viable alternative.
- Short-term loans are well-suited for individuals who require funds without delay and value the convenience of instant approvals. The potential to enhance one's credit history is additionally bolstered by the constructive impact that BNPL, when utilized correctly, can have on one's credit score.
Cons
- There are a number of disadvantages associated with the use of Buy Now, Pay Later services. Payment tracking constitutes an arduous and time-intensive undertaking, which further complicates the administration of financial responsibilities.
- Late payment penalties may impose further financial burdens on users who fail to make or delay installment payments. Customers seeking additional incentives may be deterred, in particular, by the absence of reward policies for BNPL purchases.
- An additional potential downside is that payments may remain pending till the purchased item is returned.
Conclusion
Retailers who are considering adopting the BNPL model must have a robust understanding of its financial impacts. This system is appealing significantly because of the commercial convenience and range of options it provides to the consumers.
By thoroughly weighing the pros and downsides, both buyers and sellers can make informed decisions, ensuring that the Buy Now, Pay Later experience is a win-win in the dynamic world of contemporary business.
