The Buy Now, Pay Later (BNPL) industry has grown dramatically in recent years, offering consumers an alternative to traditional credit. It revolutionizes the payment flow for both eCommerce platforms and Point of Sale (POS) systems by allowing customers to pay for products over time instead of all at once. Providers like Afterpay are the primary interface between merchants and customers, making the entire process seamless and hassle-free.
What is BNPL?
BNPL is a type of consumer loan that lets people purchase items immediately and pay for them over time, usually in installments. This option is particularly appealing to younger generations who prefer to avoid credit card debt. BNPL providers, such as Afterpay, Klarna, and Affirm, allow customers to make purchases with only an initial down payment, while the rest of the payment is divided into several interest-free installments.
Benefits of BNPL for Merchants
Merchants offering BNPL options report impressive results:
- 20% increase in cart conversions: BNPL reduces the financial barriers that stop people from completing their purchase.
- 40% increase in average order value: Customers are more likely to buy higher-priced items when they can pay in smaller installments.
Although merchants receive slightly less from BNPL transactions than from traditional credit card payments, the increase in sales volume and average order size makes up for this.
Benefits of BNPL for Customers
The key advantage for customers is the ability to get products with only a down payment while enjoying the following:
- Zero interest or fees: Unlike traditional loans or credit cards, BNPL providers typically offer interest-free plans, allowing consumers to pay the full price in manageable chunks.
- Flexibility: Payments are usually split into 4 installments, making it easier for customers to afford larger purchases.
How Do BNPL Providers Make Money?
BNPL providers are businesses, and they generate profit in several ways:
- Merchant fees: Merchants pay a fee to offer BNPL as a payment option, which is usually higher than standard credit card transaction fees. For instance, if Bob buys a product for $100 through BNPL, the provider may only pay the merchant $96. This means the merchant sacrifices a small percentage of the sale for the potential of higher sales volume.
- Late fees: If a customer misses an installment payment, BNPL providers often charge a late fee, which can be a significant source of revenue.
- Interest from selling receivables: BNPL providers sell future installments (receivables) to lenders at a discount. For example, they might sell $100 worth of future payments for $96. This creates a quick return for the provider and a high interest rate for the lender.
The BNPL Process Explained:
Here’s a step-by-step overview of how a typical BNPL transaction works with Afterpay as an example:
Start: Bob opens an account with Afterpay, linking his approved credit or debit card.
Step 1: Bob wants to buy a $100 product and chooses the “Buy Now, Pay Later” payment option at checkout.
Steps 2-3: Afterpay checks Bob’s credit score and approves the transaction.
Steps 4-5: Afterpay provides Bob with a $100 consumer loan (usually financed by a bank) and immediately pays $96 to the merchant. This means the merchant gets slightly less than they would from a credit card transaction.
Steps 6-8: Bob makes a $25 down payment, and Afterpay sends the transaction for processing to a payment gateway, such as Stripe, which forwards it to the card network. An interchange fee is paid to the card network during this process.
Step 9: The merchant releases the product and ships it to Bob.
Steps 10-11: Bob continues to pay $25 installments to Afterpay every two weeks. The payments are deducted from his credit/debit card and processed by the payment gateway.
Risks and Considerations
While BNPL offers great advantages, both merchants and customers should be aware of the risks:
- Late payment fees: If customers miss an installment, they could incur late fees, making the purchase more expensive than anticipated.
- Merchant costs: Though sales might increase, merchants may lose out on a small percentage of each sale due to fees charged by BNPL providers.
BNPL services, such as Afterpay, are reshaping how consumers pay for goods, providing a flexible and interest-free alternative to credit cards. The system benefits both merchants, by boosting sales, and customers, by offering convenient payment plans. However, it’s essential for all parties to understand the cost and potential risks involved in using BNPL services. With more consumers gravitating towards BNPL options, this payment method will likely become a mainstay in eCommerce and retail transactions.
