BNPL stands for Buy Now, Pay Later. When purchasing, the customer usually pays an upfront partial amount, then receives their merchandise, and then pays for the balance in installments over an agreed period. Another term for this practice is “point of sale installment loans”.
This idea is not new, the concept of installment plans for purchases dates back hundreds of years, if not more. Many expensive items such as vehicle and property purchases are already paid off over time, so consumers are used to the idea. They are also used to the fact that they can use their credit cards to pay for something and then pay minimum installments on their cards, although usually at high-interest rates.
The increase in e-commerce over recent years has driven innovation in payment methods, such as mobile payments. As more and more customers turn to online shopping for more and more types of items, it makes sense to make it even easier for them to pay for their goods, especially pricier items that they may hesitate to purchase if they had to pay the full purchase price in one go. BNPL offers customers an attractive way of paying for their online purchases in installments, without the high-interest rates of credit card payments.
While the concept of payment plans is not new, the online ecosystem has introduced a new option – third-party BNPL providers.
How do third-party BNPL services work?
Third-party BNPL service providers offer the customer an option at the checkout stage to pay for their purchases in installments. When the checkout process is completed, the BNPL provider pays the merchant in full. The customer then pays the BNPL provider the balance of installments. The types of payment plans offered to the customer may vary from provider to provider. Options may vary from 4 to 12 installments, with payments made by automatic debit from a bank account, or credit or debit card accounts. Interest may or may not be charged, depending on the provider, the value of the loan, and the number of repayment installments.
What are the advantages of third-party BNPL providers for merchants?
The biggest advantage for e-commerce merchants is that with BNPL partners the merchant gets the money upfront, and the BNPL provider assumes all the risk.
But there are other advantages to offering BNPL options as well:
An expanded customer base
Merchants can include payment options to customers who may not have credit or debit cards, and therefore have previously been excluded from the online ecosystem
Encourages higher customer spend
An option to break an expensive purchase down into manageable pieces is very attractive to customers and encourages them to spend more than they would without this option
Improves customer experience
Customers like options and having more control over their purchasing
Encourages customer loyalty
If a customer has a positive experience with an online retailer they are more likely to purchase from that retailer again
Appeals to younger customers
Many younger customers, who tend to be avid online shoppers, either do not have or do not want a credit card. BNPL offers them an attractive alternative
What are the disadvantages of third-party BNPL providers for merchants?
Although it sounds wonderful, there are some drawbacks and restrictions for merchants if they want to go the third-party BNPL route:
The fees for BNPL transactions tend to be higher than fees for credit card transactions, so it costs merchants more
Not all BNPL services integrate easily with POS systems or online checkouts. Merchants may have to fork out extra for additional integration and add-ons for their checkout
Slower checkout process
While paying online with a credit card is fairly instantaneous, BNPL payments are not, at least not the first time. Customers have to do a small application when choosing a BNPL option for the first time with a provider, as the service is essentially a loan
Not all merchants are accepted for BNPL services. Many types of merchants, including high-risk merchants, are simply not eligible for these services
Fraud and chargeback risk
As with any payment method, there is a risk of fraud and chargebacks
So while BNPL as a concept is very appealing to merchants, at this time it is simply not viable for many merchants due to high costs or even availability. However, as the third-party BNPL industry grows we can expect to see more and more options for merchants in the future, including for high-risk merchants.
If BNPL is not a viable option for your business, talk to us at Baer’s Crest about the various payment options and services that are available to you. We offer a range of secure and affordable services through our respected and professional partner providers. Talk to us about the best options for your business.