What Is Buy Now Pay Later (BNPL) & How Does It Work?

Buy now, pay later (BNPL) financing offers an appealing solution to customers who do not have the immediate funds to make a purchase and merchants fearing the possibility of a lost sale. With BNPL, your customers can enjoy your products now and pay for them later, often without incurring interest. Now, the obvious question: Is shop now, pay later financing too good to be true? Find out below, where we detail how BNPL services work, their advantages, their disadvantages, and other factors merchants should consider before utilizing this financing option.

What Is Buy Now Pay Later (BNPL) Financing?

At its core, buy now, pay later financing is similar to a loan. However, instead of putting down money upfront or making payments for years, a consumer can purchase something now with little or no money down and then pay off the balance, which typically doesn’t accrue any interest.

How Does Buy Now Pay Later Work?

Buy now, pay later financing—also called “point-of-sale loans”—integrates with your online shopping cart to allow consumers to purchase an item, take it home, and pay for it at a later date. While similar in nature to an interest-free loan, BNPL services are easier to qualify for than standard loans. Additionally, most BNPL lenders only do a soft credit pull, which does not impact your credit score. However, like a loan, making late payments can hurt your credit.

How BNPL Works:

  1. A customer makes a purchase at a participating business and chooses the buy now, pay later option at checkout.
  2. Upon approval, the consumer makes a small downpayment or no downpayment.
  3. The remaining balance, often interest-free, is paid off in several installments via debit or credit card, electronic funds transfer, or check.

Below, we explore the most popular BNPL services. Each of these options is easy to use and often lets your customers shop interest-free.

Best for Easy Integration: PayPal Credit

PayPal Credit, formerly called Bill Me Later, is perhaps the best-known shop now, pay later option available today. Customers may use PayPal Credit when checking out via PayPal. Sometimes confused with Paypal’s Pay in 4—yet another BNPL option—PayPal Credit offers more flexible installment options than Pay in 4.

Best for Consumers with Bad Credit: Perpay

Perpay does not charge interest on shop now, pay later purchases. Additionally, it offers customers a repayment plan of 12 installments. Perpay assesses its lending based on a customer’s income rather than credit score, which makes it a good option for customers with poor credit.

Best for Preventing Overspending: Afterpay

Like many of the other BNPL options on this list, Afterpay offers no interest and soft credit inquiries. Its standout features are its initial spending limit of $600 and required downpayment of 25 percent of the purchase value, both of which help curb consumer overspending. Acquired by Square in 2021, Afterpay services many notable merchants including Amazon, Target, and CVS.

Best for No Credit Check: Splitit

Splitit integrates directly into businesses’ online checkout and allows customers to make equal payments for two to 36 months. The consumer pays no interest as long as they pay on time. However, customers do pay a 1.5 percent + $1.50 fee per installment payment. Also, Splitit’s long list of prohibited merchants makes it an unviable option for some businesses.

Best for Larger Purchases: Affirm

Affirm currently partners with more than 29,000 merchants, including Walmart, Amazon, Nike, Nordstrom, and Best Buy. Customers can break up large purchases into 3-, 6-, or twelve-month repayment plans. Although terms vary by merchant, a customer’s balance may be subject to as much as 30 percent APR if they miss or cannot make a payment.

Best Options for Repayment Options: Klarna

Klarna offers quite flexible repayment options. Customers can choose Pay in 4, Pay in 30, or a longer financing plan. Klarna’s Google Chrome extension enables desktop access to its BNPL services. However, one downside is that installment payments made ten or more days later incur a $7 fee.

Best for Smaller Online Purchases: Sezzle

Sezzle is best for smaller purchases between $50 and $200. However, Sezzle states that customers can’t make additional purchases if they miss a payment. Sezzle also requires customers to make a down payment of at least 25 percent and pay off the balance within six weeks.

Best for Seamless Integration with Shopify

Shop Pay, an installment payment service by Shopify, offers a streamlined checkout process for Shopify merchants. Customers can split purchases into four interest-free payments, making it easier for them to manage their spending while providing merchants with immediate payment.

Is Buy Now Pay Later a Good Idea for Merchants?

According to YouGovAmerica, buy now, pay later financing is a determining factor in deciding how much to spend for 44 percent of consumers. Nearly half of consumers may purchase less or elsewhere if your business doesn’t offer BNPL services. However, it’s important to note that merchants are usually charged a fee to use BNPL financing, which can range from 2 to 8 percent of the purchase amount. Instead of a percentage of the purchase, some buy now, pay later companies charge a flat fee of 30 cents (or more) for each transaction.

While these fees are certainly a drawback, shop now, pay later financing offers many benefits that may outweigh these fees, including:

How to Accept BNPL at Your Business

Shop now, pay later transactions are reportedly set to jump by 92 percent, from $353 billion in 2019 to $680 billion by 2025. Although in-store and eCommerce setup can be challenging, it may be well worth the effort to grow your business’s sales. To implement a BNPL service at your business, begin with these steps:

  1. Set up an account with the BNPL provider of your choice.
  2. Purchase a point of sale (POS) system or eCommerce platform that works with your BNPL provider.

For in-store setup, contact your BNPL provider to help initiate a connection. However, be aware that some BNPL providers may charge you for setup assistance.

For eCommerce setup, simply use your merchant ID or other company details to activate the integration in your business’s website builder.

Note: If you already have a POS system or eCommerce platform, look for a BNPL service that integrates with the system or platform you use.

Whether you’re a brand new business or a well seasoned operation, we’re here to help with all your eCommerce needs.

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woman shopping online on her smartphone with buy now pay later financing

Advantages and Disadvantages of BNPL

Buy now, pay later financing has several key advantages and potential disadvantages that you should consider. Below lists its advantages, followed by disadvantages.

Buy Now Pay Later Advantages

  • Higher conversion rates: It’s not uncommon for customers to abandon their carts without completing a purchase when shopping online. Buy now, pay later financing improves conversion rates by providing customers with a budget-friendly payment option. A study by Klarna reported a 20 percent increase in checkout conversion when shoppers choose Klarna financing.
  • Increased average order value (AOV): AOV is an eCommerce metric measuring the average amount spent by a customer placing an order. The same study by Klarna also linked its financing to a 60 percent increase in AOV.
  • Increased purchasing power: Smaller, incremental payments allow customers to purchase big-ticket items and pay for them over time, often without accruing interest.
  • Circumvented pain points: BNPL solutions help manage customers’ pain points associated with other payment options, most notably credit checks and interest rates.

Buy Now Pay Later Disadvantages

  • High fees: Compared to traditional payment methods, buy now, pay later financing options place higher fees on merchants, which can range from 3-6 percent of a customer’s purchase.
  • Not all industries qualify: Businesses considered high risk, such as those within the tobacco, adult, or firearms industries, may have difficulty finding a BNPL provider.
  • Challenging integration: Integrating a BNPL solution into your checkout can be challenging and expensive.

Alternatives to BNPL

Alternatives to shop now, pay later financing have existed for years. Some offer greater benefits, like flexible repayments, while others charge high interest rates or require payment in full before the product is available. Some examples include:

woman shopping on a mobile app with shop now pay later
  • Rent-to-own: Rent-to-own arrangements allow customers to pick out, for example, a sofa or television, pay a certain amount down, and make payments each month.
  • Credit cards: Although most credit cards charge high interest rates, they are convenient. Also, interest is only charged on the outstanding balance. If a consumer pays the balance in full every month, they won’t incur interest charges.
  • Layaway: Layaway lets consumers “layaway” items to be paid for later, at which point they can pick up the items. Some plans require a small downpayment to put items on hold.
  • Short-term, interest-free loans: Some lenders are trying to appeal to people who only need a small influx of cash for a short time, such as 15 to 30 days. Some of these loans come with no interest.

Final Thoughts on BNPL

Buy now, pay later financing is very appealing to cash-strapped consumers, especially if they’re purchasing a big-ticket item. These services are also appealing to merchants, who may see an increase in their business’s sales and average order value. While the biggest disadvantage to merchants is the higher fees, as the saying goes, you sometimes have to spend money to make money.

With a BNPL shopping cart integration, you can recover sales from customers who can’t afford to pay upfront for your product. A win-win for your and your customers!

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