Credit cards have taken consumerism by storm over the past decade. According to a Transunion report, there were 167.2 million credit card users in mid-2023, with the figure expected to grow this year and beyond.
But what about those who don’t have a credit card, or prefer not to use one? That’s where buy now, pay later (BNPL) comes in.
BNPL is a form of short-term financing where consumers can buy an item now and pay for it later. There’s often no extra charge to the customer. Instead, the store that offers BNPL as a payment option typically pays a fee to the BNPL service provider.
BNPL is surging in popularity because of the ease and convenience it provides to shoppers. Let’s dig a bit deeper into what BNPL is, how it works, and the key players that make it happen for today’s customers.
What is buy now, pay later (BNPL)?
A buy now, pay later plan offers an installment loan to customers at checkout so they can buy products on credit without a credit card. Popular BNPL options include Shop Pay Installments from Shopify, Afterpay, Affirm, and Sezzle.
Many providers first run a soft credit check on the customer, then release the funds for an installment loan. Customers get different options for settling the loan balance, depending on the amount borrowed and the company used.
Some BNPL companies charge fees for late payments or default fees, and some payment options incur interest, while others do not. Some providers may offset the low interest charged to the consumer with the fee that they charge the merchant.
How BNPL works
The BNPL process is driven by consumers and retailers. Here’s how it works:
- A customer adds an item to their cart and initiates the checkout process. As a customer, you’ll start the BNPL process as you would any other ecommerce transaction. You visit your favorite online stores, choose merchandise, and prepare to pay.
- The retailer’s BNPL partner offers the option to buy now and pay later. At checkout, the customer will have the option to pay using BNPL, along with other payment choices like debit or credit cards.
- A soft credit check is performed on the customer. When the customer opts to buy their merchandise using BNPL, they provide some personal details to the lender (such as an address and Social Security number). The BNPL lender then runs a soft credit check on the customer to ensure they have the financial standing to pay back their loan based on their credit history.
- The BNPL service deducts a fee. The BNPL vendor will now bill the retailer, taking a percentage of the retail transaction as a fee. The fee, which is typically between 2% and 8%, is cut from the amount the BNPL provider remits to the merchant. This works similarly to the arrangements credit card providers have with retailers.
- The customer makes the remaining payments over time. Many BNPL companies offer interest-free payments to customers who settle their full balance in a short period (typically 30 days after using BNPL). If customers need more time to pay off their balance, the lenders provide different payment plans with varying interest rates. In short, the faster a customer pays off the bill, the less overall interest they pay.
Benefits of BNPL for customers
Consumers gain many potential advantages when using a BNPL service, such as:
Flexible payment options
As a customer, you should get different payment options at checkout when using a BNPL service. Typically, you can choose between paying the full purchase price using the BNPL service and splitting your purchase between BNPL and some other payment method (such as a debit card).
Potential interest-free payments
If you select a short loan period and pay the BNPL vendor on time, you can borrow money without incurring any interest.
Reduced reliance on credit cards
A BNPL service offers many of the same advantages as a credit card, albeit for small purchases. Some BNPL companies also provide a virtual card number that works similarly to a credit card. You can use this card number to complete payments on your favorite online retail stores. Your BNPL vendor’s official website or smartphone app will allow you to request a virtual card number with enough funds to complete your purchase.
7 best BNPL services
Retailers consider buy now, pay later services important because they’ve been shown to improve the customer experience. Due to this retailer preference, a number of BNPL vendors have popped up in recent years. Here are seven highly praised options:
1. Shop Pay Installments
Ideal for retailers who are a part of the Shopify ecosystem, Shop Pay Installments allows customers to pay their balance in four interest-free installments. The BNPL service offers small businesses the same BNPL advantages enjoyed by major brands, including less cart abandonment and a larger average order value. As a Shop Pay user, you can help customers spread out the cost of larger transactions while still receiving the full balance at the time of purchase.
2. Afterpay
Founded in Australia, Afterpay is one of the biggest and most well-known BNLP service providers worldwide. One unique feature of Afterpay is its smart credit-limiting tool. This technology places a spending limit on shoppers based on their credit background. The idea is to prevent them from spending more than they can pay back. Afterpay also helps customers stay on schedule by sending consistent reminders to clear payments.
3. Affirm
Affirm is among the best BNPL services, with big retailers like Target and Amazon prominently offering it as a payment option. The company charges no fees and no interest for short-term loans, but requires interest payments with 10% to 30% APR on long-term borrowing. The interest depends upon the customer’s credit, but no fee is charged. For customers shopping at retailers that don’t already work with Affirm, it might be possible to use the service through a virtual card.
4. PayPal
One of the best-known online payment processing solutions today, PayPal offers a variety of services to businesses, including credit and business financing. PayPal’s key lending product, PayPal Pay Later, provides two payment options. The first is Pay in 4, which splits transactions into four scheduled payments for purchases between $30 and $1,500. The second option allows customers to divide purchases ranging from $199 to $10,000 into monthly payments over six to 24 months, with a standard interest rate of about 24% APR.
5. Sezzle
Sezzle is popular around the world for its flexible payment options. There’s a signature feature of Sezzle that allows customers to push their payment due dates back by up to two weeks if they cannot pay the balance on time. Sezzle requires a 25% down payment on all purchases, but you can pay off loans without owing interest.
6. Klarna
Founded in Sweden, Klarna has more than 150 million customers and partnerships with hundreds of thousands of retailers worldwide. Depending on how much money you need to complete a purchase, Klarna may sometimes conduct a soft or hard credit check. The company also uses a proprietary metric, called Purchase Power, to determine how much money users can access. Purchase Power looks at the user’s payment history within Klarna to determine how trustworthy they are. When you pay interest on your purchases, it maxes out at 25%.
7. Zip
Zip is an Australian BNPL provider with two options: Zip Pay and Zip Money. Zip Pay is for everyday purchases up to $1,000, allowing you to split payments with no interest. Zip Money is for larger purchases over $300, up to $5,000, with three months interest-free. Some businesses offer up to $50,000 interest-free with Zip Money.
Considerations for choosing a BNPL provider
When looking for BNPL providers, make sure to consider the following:
- Integration and compatibility: Ensure the provider integrates smoothly with your ecommerce platform. For instance, Shop Pay Installments lets customers pay monthly—both online and in store—by linking to your Shopify site and POS.
- Borrowing amount: Confirm the provider lends enough for your products. Check that your products aren’t priced too low to qualify. Shop Pay Installments supports orders from $50 to $20,000.
- Customer experience: Look for a provider with a simple interface, clear terms, and reliable support. Shop Pay Installments lets customers see their payment options early in the purchase.
- Funds disbursement: Consider how quickly you get paid. Shop Pay Installments pays you within one to three business days after capturing payment.
- Flexibility and customization: Choose a provider that offers flexible payment options and customization to match your business needs.
- Data analytics and insights: Opt for a service that tracks key metrics and allows data export. This helps you understand customer behavior and improve your business.
Replace your layaway plan with BNPL
When considering BNPL for your business, you will have to consider two factors. One is the increased shopping carts of people who use a BNPL service. The other is the fees that BNPL providers charge on each purchase. Balancing these two considerations is critical to profiting from a BNPL option. Much like credit cards, the right BNPL service can inspire customers to spend more; the increased sales volume more than compensates retailers for the fees they’re paying.
Bu now, pay later FAQ
How does buy now, pay later make money?
BNPL services make money by charging merchants a fee for each transaction. This fee typically includes a percentage of the sale plus a fixed amount. Additionally, these providers generate revenue through interest charges and fees for late payments.
How do I set up buy now, pay later for my business?
You can set up a buy now, pay later option for your business by following these steps:
- Research BNPL services that integrate with your ecommerce platform.
- Compare costs, terms, and features of different BNPL providers.
- Select the BNPL provider that suits your business needs best.
- Follow integration instructions to connect the BNPL service.
- Run test transactions to ensure everything works smoothly.
- Inform your customers about the new buy now, pay later option.
What is the catch with buy now, pay later?
If you can settle the purchase completely before the interest-free period ends and have no other debts, then buy now, pay later might be beneficial. However, if you’re unable to clear the purchase within the interest-free period or have existing debt, this option could become risky and expensive. Although a soft credit check doesn’t affect your credit scores, BNPL loans now appear on your credit report with the three major credit bureaus, based on your payment activity.
How do financial services organizations benefit from offering BNPL services?
Financial services organizations benefit from offering BNPL services by attracting more customers who prefer flexible payment options. This increases sales and customer loyalty. Additionally, these organizations earn revenue through merchant fees and late payment charges.
Who typically offers buy now, pay later services?
- Ecommerce platforms like Shopify and WooCommerce
- Dedicated BNPL providers such as Klarna and Afterpay
- Retail stores that provide BNPL options at checkout
- Traditional financial institutions such as banks and credit unions
- Other financial services organizations
Do buy now, pay later payment methods affect a customer’s credit score?
Buy now, pay later (BNPL) payment methods can impact a customer's credit score. Most BNPL services perform a soft credit check initially, which doesn't affect the score. However, missed payments can lead to a negative credit history.
A negative credit history can make it harder to get credit approval for future loans or credit cards. It's crucial to manage BNPL payments responsibly to avoid this issue. Unfortunately, using BNPL won't help remove negative credit history already on your report.