What is Buy Now Pay Later and How Does It Work?

As a business owner, it’s crucial that you ensure customers can easily make payments, both online and in-store. Offering different ways to pay enables customers to choose the option that is most convenient for them.

According to the Square 2022 Future of Retail report, consumers want a variety of options for how they pay, no matter where they are making their purchases. Offering a buy now, pay later (BNPL) payment option is one way to make buying easier for your customers.

BNPL services have been around for many years. Since 2019, however, they have grown at an unprecedented rate. According to a study by Bain & Company between 2019 and 2020, the UK BNPL market grew 60%-70% to reach a value of £6.4 billion.

It’s unlikely to be a coincidence that this growth spurt began around the same time as the Covid-19 pandemic. There are, however, strong indicators that BNPL has a sustainable, long-term future. In particular, it benefits from developments in Open Banking. It is also set to benefit from regulation encouraging greater confidence in the service.

Here’s what you need to know about BNPL financing and how it can benefit your business.

What is buy now, pay later?

BNPL is a type of instalment payment service that allows customers to make purchases without paying the total value upfront. Customers generally have to put down part of the cost as a deposit. They then pay off the remaining balance in interest-free instalments over a defined period. This is typically around 3-6 months but can be longer.

Although BNPL is often associated with the fashion sector, its reach is actually much broader. Both the study by Bain & Company and figures from Statista reveal that it’s used across a wide range of professional and retail sectors. It’s also used outside the Gen Z and Millennial demographics.

Why are buy now, pay later solutions on the rise with consumers?

One of the key attractions of BNPL financing is that customers only have to pay a percentage of the whole price upfront, but still get immediate access to their purchase. What’s more, customers do not pay any interest if the instalments are paid as scheduled.

According to the aforementioned study by Bain & Company, BNPL is viewed very favourably by consumers due to its convenience, simplicity and low cost. Over half (57%) of UK merchants using BNPL saw an increase in basket conversion. Almost half (46%) saw an increase in average order value. What’s more, this increase was significant. It was typically 20%-30% more than for credit cards.

Benefits of buy now, pay later for businesses

As a business owner, you receive full payment for the product up-front, and typically only pay a transaction fee to your BNPL partner. The risk of payment collection lies with the BNPL provider. This means you don’t have to manage debt collection or calculate the impact on your cash flow.

Also, since customers get immediate access to their purchases, you don’t have to deal with storage challenges. These are common in layaway payment plans where you hold products until customers complete payment.

Last, but definitely not least, you get the benefit of increased exposure. According to the same Bain & Company report, over half (54%) of UK merchants benefited from co-marketing activities that exposed their brand to new customers. Almost a quarter (23%) could directly track this to a referral from their BNPL providers

How does buy now, pay later work?

BNPL payment options are offered at checkout — whether online or in-store. When a customer chooses the BNPL payment option, the BNPL service provider checks if they are eligible for the service. They can usually make their decision in seconds.

If approved, the customer pays a deposit. This is typically a percentage of the overall purchase price. The rest of the payment is then spread into a fixed number of interest-free payments.

The customer receives clear, upfront information about the exact amount to be paid with each instalment and when they will be due. In the UK, the standard repayment methods are Direct Debits and card payments. Customers may also choose to use manual bank transfers. It’s extremely unusual for customers in the UK to make cheque payments.

How to offer buy now, pay later to your customers

You’ll need to integrate a payment platform that accepts BNPL into your point of sale or online store. This means signing up as a merchant with a BNPL payment service provider, such as Clearpay. Once your application is approved, you will integrate the payment option into your existing system. Customers will then see this option in your online checkout process.

What are buy now, pay later apps?

Many BNPL service providers have consumer-facing apps where customers can download and discover both new products and new retailers. This additional discovery channel is an effective way for businesses to attract new customers. Most BNPL providers have shop directories or marketplaces within the app. These offer an additional way for new customers to learn about your business.

Each BNPL provider has its own terms for listing businesses. For some BNPL providers, you simply opt into the directory service after signing up. For others, you may need to provide more specific information about your business.

How to promote buy now, pay later to your customers

Signing up with a BNPL service provider is only the first step. The next is to inform your customers about this payment option. You can do this in a number of ways.

Promoting buy now, pay later online

• List all the payment options you accept, including BNPL, prominently on your website.

• Share your payment on social media and in newsletters. Include useful information about the BNPL programme and how customers can take advantage of it. Avoid any language that pressures customers to use this option, and instead focus on just letting them know it’s one of many ways they can pay.

• Include information about BNPL on any payment-related FAQ sections you have on your site.

Promoting buy now, pay later in store

• Display “Buy Now Pay Later” signage outside and inside your store. Use window decals, postcards, stickers, and checkout cards. You can download and print logos and assets of your chosen BNPL partner from their website.

• Train your staff to inform customers about the BNPL option during in-store conversations.

• Square Online offers several integrated solutions that make it easy to promote your business on your website, social media pages, or email newsletters.

Things to consider before offering BNPL payment options to your customers

While offering a BNPL could help drive incremental sales and attract new customers, below are things to consider before taking the plunge.

Price of your product

Some BNPL providers have a minimum order amount, and the product types financed by BNPL providers also differ. Some providers cover small, everyday items, while others only offer financing for high-ticket products. It’s therefore important that you do your research and choose a provider that works best for your product price range.

Payment terms for the customer

Ultimately, the goal with BNPL is to offer your customers a flexible payment option. Review the payment terms of the service provider to ensure that they are suitable for your customers. Understanding those payment terms also makes it easier to educate customers about BNPL.

Fees and charges

You’ll pay a fee for each sale. Most BNPL providers will charge both a flat fee and a commission that’s based on transaction value and volumes. Payout times also differ, usually starting at 24 hours. Be sure to compare rates and choose a payment platform that best supports your business. Plus, as with any service, make sure you read the fine print.

Buy now, pay later services are seemingly here to stay. They may offer benefits for your business, including increased average order value and higher conversion rates. Just make sure you choose a BNPL service provider that will support your business in the long run.

Once you’ve set up BNPL, let your current and prospective customers know about it by promoting it on your website, email newsletter, and social media pages.