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

What Is Buy Now Pay Later and How Does It Work?
Buy now, pay later services have grown increasingly popular over the past couple of years. Here’s what you need to know about BNPL financing and how it works for businesses.
by Chidinma Nnamani Jan 20, 2022 — 5 min read
What Is Buy Now Pay Later and How Does It Work?

As a business owner, it’s critical to ensure a hassle-free payment experience for your customers — whether they’re paying online or in-store. Offering different ways to pay enables customers to choose the option that is most convenient for them. According to the Square 2023 Future of Commerce 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 grown increasingly popular over the past couple of years. According to a study by Credit Karma, 44 % of consumers have used BNPL services to purchase an item. So it’s no surprise that many businesses are already on board — 25% of U.S. merchants already accept BNPL payments while 46% of merchants say they are either likely or extremely likely to accept BNPL within the next year, according to a Zip survey of over 1,000 businesses.

Here’s what you need to know about BNPL financing and the benefits for your business.

What is buy now, pay later?

BNPL is a type of installment payment service that allows customers to make purchases without paying the full value upfront. Customers pay the remaining balance in interest-free installments over a defined period of time, usually several weeks or months. BNPL can be used for a range of retail products, and even some professional services. It’s particularly popular in the fashion sector, and one Afterpay report found that consumers are interested in using BNPL for purchases including travel, vehicle repair, and even dental work.

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

One of the key attractions of BNPL financing is that customers pay only one installment upfront, but get immediate access to their purchase. Also, customers do not pay any interest if the installments are paid as scheduled. A survey by Ascent found that 44% of customers choose BNPL services because it helps them make purchases that otherwise wouldn’t fit in their budget, while 36% say it helps them avoid paying credit card interest. In fact, BNPL can be particularly useful for consumers who don’t have a credit history or don’t want to use credit cards.

Benefits of buy now, pay later for businesses

As a business owner, you receive full payment for the product upfront, and typically only pay a transaction fee to your BNPL partner. The risk of payment collection is borne by the BNPL provider, so you don’t have to manage debt collection or calculate the impact on your cash flow.

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

Other benefits may include increased average order value and higher cart conversions. When customers have the option to spread the cost over multiple payments, they may choose to add more items to their cart. A Similar web report shows that merchant websites with a BNPL payment option found a 6% conversion rate compared to 4% for merchant websites without it. BNPL can potentially help you reach more customers, particularly when it comes to high-ticket products and services that they can more easily budget for with multiple installments.

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 and gives a decision, usually in seconds. If approved, the customer makes a down payment, which is typically a percentage of the overall purchase price, say 25%. 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 each time and when those payments should be made. Depending on the BNPL provider used, the customer can typically choose to remit payment manually via check or bank transfer, and can also authorize automatic deductions of due payments from their bank or debit or credit card.

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 Afterpay. Once your application is approved, you 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 that customers can download and discover eligible products to buy as well as participating retailers to patronize. 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, offering an additional way for new customers to learn about your business.

Each BNPL provider has their own terms for listing businesses. For some BNPL providers, you simply opt in to their 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 and arguably more important step 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.

Promote your offerings on social media and in newsletters. This announcement should include useful information about the BNPL option and how customers can take advantage of the service. Avoid any language that pressures customers to use this option, and focus instead 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 bite.

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. So it’s important to 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. As with any service, make sure you read the fine print.

Buy now, pay later services are likely here to stay, and they may offer benefits for your business, from increased average order value to higher conversion rates. Choose a BNPL service provider that will support your business in the long run. And once you’ve set up installment payments, ensure your current and prospective customers know about the offering by promoting it on your website, email newsletter, and social media pages.

Chidinma Nnamani
Chidinma Nnamani writes about the food industry, digital marketing, and technology — and explores the fine spaces where they intersect. She works with B2B startups and agencies, helping them deliver clear, actionable, and insightful content for business audiences.


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