The “Buy Now Pay Later” option has become increasingly popular as a payment method. Over 50% of customers in the US have utilized this service, while nearly 10% of online transactions in Australia are made through a buy now, pay later provider.
In 2020, it was the fastest-growing payment method in India and the UK. Analysts predict that by 2025, these services will make up approximately 12% of the total global e-commerce spending on physical goods.
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What Is Buy Now, Pay Later?
Buy Now Pay Later (BNPL) is a convenient payment option that gives customers the flexibility to buy products or services without making the full payment upfront. With BNPL, customers can finance their purchases and repay the amount in fixed installments over a period of time.
This means that a customer who buys something worth $100 can choose to pay for it in four equal installments of $25, without any additional interest charges. Various businesses, particularly e-commerce retailers, utilize buy now, pay later services like Affirm, Afterpay, Klarna, and Zip to enhance conversion rates, increase the average order value, and expand their customer base.
As a merchant, when customers choose the “Buy Now Pay Later” option, you will receive the entire payment for the item upfront, with any applicable fees deducted, just like you would with a credit card payment.
The advantage is that you don’t have to handle the financing process. Instead, this responsibility is taken on by the buy now, pay later providers who handle tasks such as assessing customers’ creditworthiness, managing the installment plans, and collecting payments.
How Buy Now, Pay Later Works
Buy now, pay later (BNPL) programs have different terms and conditions, but generally, they offer short-term loans with fixed payments and no interest. You can use a BNPL app to make the purchase, or you may have BNPL options through your credit card.
When you use the Buy Now Pay Later (BNPL) option, you have the opportunity to buy items from a participating store and choose to pay for them at a later time. If your request is accepted, you will need to make an initial payment, usually around 25% of the total purchase value.
The remaining amount can be paid off gradually, without any additional interest charges, through a series of installments over a period of several weeks or months. You have the option to make payments for your purchases through various methods such as deducting them automatically from your debit card, bank account, or credit card.
Some BNPL lenders may also accept payments through check or bank transfer, although the Consumer Financial Protection Bureau (CFPB) states that most of them require consumers to use autopay as the only payment option.
When comparing BNPL and credit cards, the key distinction lies in the interest charged on balances carried forward to the following billing cycle. While certain credit cards may provide a 0% APR for a limited period, they typically impose interest thereafter.
Unlike credit cards, BNPL options allow you to carry a balance or utilize your credit line without any time restrictions. Buy Now Pay Later (BNPL) applications typically do not impose any interest or fees on users.
These apps also provide a predetermined repayment schedule, ensuring that users are aware of their payment amounts in advance. Each payment remains consistent throughout the repayment period.
How Buy Now, Pay Later Affects Your Credit
Many companies that offer the option to buy now and pay later typically only perform a soft credit check during the approval process. This type of credit check does not have any negative impact on your credit score.
However, there are some companies that may conduct a hard credit check, which could temporarily lower your credit score by a few points. It’s important to note that certain buy now pay later loans may be reported to one or more of the major credit bureaus, potentially affecting your credit reports and overall credit score.
Before committing to a Buy Now Pay Later (BNPL) loan, it is crucial to assess your ability to make the monthly payments. Failing to do so may result in delinquency on the loan, leading to negative consequences for your credit history, credit report, and credit score.
Research conducted by the Consumer Financial Protection Bureau (CFPB) revealed that individuals utilizing BNPL loans frequently experienced delinquencies on their other credit lines and generally had lower credit scores.
What apps let you buy now, pay later?
Affirm
Affirm collaborates with major retailers such as Amazon and Walmart, offering a convenient Buy Now Pay Later option. With Affirm’s pay-in-four plan, customers can enjoy interest-free payments. Additionally, Affirm provides monthly payment plans that extend up to 60 months, with an Annual Percentage Rate (APR) ranging from 0% to 36%.
Afterpay
Afterpay collaborates with popular retail brands such as Old Navy and Gap to provide convenient payment options. Customers can choose between an interest-free pay-in-four plan or monthly plans lasting either six or 12 months.
The monthly plans come with varying APR rates, ranging from 0% to 35.99%. As long as payments are made on schedule, no additional fees are incurred with Afterpay. However, a maximum fee of $8 will be charged if payment is not received within 10 days of the due date.
Apple Pay
Apple Pay Later allows users to make purchases online or in-app using Apple Pay, as long as the purchases are under $1,000. Unlike other similar services, Apple Pay Later does not charge any interest or fees for its pay-in-four plan. To use this feature, users need to link their Apple Pay Later plan to a debit card, and they can conveniently manage their payments through the Wallet app.
Klarna
You can find Klarna available for use at popular retailers such as Sephora and Macy’s. Klarna’s pay-in-four option allows you to make payments without any interest charges. However, it’s important to note that if you fail to make a payment within 10 days of the due date, Klarna may apply a late fee of up to $7.
Additionally, Klarna provides the option for monthly payment plans ranging from six months to four years, with an Annual Percentage Rate (APR) ranging from 0% to 29.99%.
PayPal
PayPal provides a convenient payment option called “Buy Now Pay Later” which allows customers to make purchases in four installments or choose a monthly payment plan. This service is available both online and through the PayPal mobile app, and can be used at popular stores such as Best Buy and Home Depot.
The pay-in-four option does not incur any interest charges, whereas the payment plans of six, 12, or 24 months come with APR rates ranging from 9.99% to 29.99%.
Sezzle
Sezzle, available at numerous stores, including Target, allows customers to make purchases using their pay-in-four plan without any interest charges. While there is no penalty for late payments, if you fail to make a payment within 48 hours, your Sezzle account will be deactivated. To reactivate your account, you will need to pay a fee of $10 to use Sezzle once more.
Zip
Zip’s mobile app allows users to make purchases with the Buy Now Pay Later option anywhere that Visa is accepted. When utilizing the pay-in-four feature, Zip charges a small installment fee, typically around one dollar per installment. In the event of missed payments, Zip applies a late fee ranging from $5 to $10, depending on the state of residence.
At the checkout, certain retailers provide various payment options known as Buy Now Pay Later (BNPL). When faced with the decision of selecting between multiple plans, it is advisable to opt for the one that does not charge any interest. This choice is more cost-effective. However, it is important to ensure that you can make the installment payments punctually.
Alternatives to buy now, pay later
Though buy now, pay later can provide a simple and convenient way to cover a purchase, it doesn’t offer the same features as other financing methods. You may want to consider these alternatives.
0% interest credit card:
If your credit score is 690 or higher, you may be eligible for a 0% APR credit card. This type of credit card does not charge any interest during an introductory period, which typically lasts for 15 to 21 months.
By making payments on this card, your credit card companies will report them to credit bureaus. This can potentially help improve your credit score. Additionally, you might receive a sign-up bonus or gain access to a rewards program.
Small personal loan:
If you are looking for a more extended period to pay back your loan, opting for a small personal loan can be a wise decision. Personal loans cater to borrowers with varying credit scores, and similar to credit cards, you can establish a positive payment history with credit bureaus.
While personal loans do accrue interest, the advantage of longer terms is that the monthly payment can easily align with your budget.
How do buy now, pay later services make money?
Services that offer the option to buy now and pay later make money by collecting fees from both customers and businesses. The fees that businesses have to pay vary depending on the provider, but usually involve an initial setup fee and a fixed fee for each transaction.
On the other hand, customers are typically charged interest fees or late fees if they fail to make their payments on time.
What are the benefits of buy now, pay later services?
Having a smooth and hassle-free checkout process is crucial for all businesses, especially those that are aiming for ecommerce expansion. Customers nowadays expect payment experiences that are easy to navigate and can be personalized according to their preferences, allowing them to choose their preferred payment method.
By offering buy now, pay later options, not only can you provide this flexibility and convenience to your customers, but you can also minimize the risk of fraud and enhance conversion rates and the average value of orders.
By offering buy now, pay later options, you can:
Get paid up front and receive protection from repayment risk and fraud
When using a buy now, pay later option, you will receive the full amount of the transaction right away, regardless of whether or not the customer is able to make their installment payments.
This is advantageous for your business because it shifts all the customer risk to the buy now, pay later provider, protecting you from potential fraud.
In the event that a customer disputes the transaction due to fraud, the buy now, pay later provider will bear the risk and cover any related expenses.
Reach more customers
Providing a range of payment options is important for creating a seamless and convenient payment process, which can attract a larger customer base.
One payment option that is especially favored by younger customers, who may not possess a credit card, is the buy now, pay later service.
Recent statistics show that over 26% of millennials and nearly 11% of Generation Z shoppers have used buy now, pay later services for their online purchases.
These services also offer established marketing channels, such as shop directories and email marketing, which can help you expand your customer reach.
Offer a better customer experience
The option to “buy now, pay later” allows customers to access financing quickly and conveniently. Instead of undergoing a rigorous credit check, customers only need to go through a soft credit check.
This eliminates the need for separate applications, application fees, or extra processing time. Additionally, most buy now, pay later providers offer straightforward repayment plans and terms that are easy to comprehend. For returning customers, the payment process is even more seamless, requiring just a few clicks to complete.
Boost your average order value
Buy Now Pay Later services are a convenient way for customers to make larger purchases without the burden of paying the full amount upfront. These services enable customers to divide the payment into smaller installments that can easily fit into their budget.
This flexibility encourages customers to consider buying more items, especially in the case of businesses that offer lower-priced goods. Knowing that they can pay the total amount over time motivates customers to make additional purchases.
Increase conversion
When customers have the option to buy now and pay later, they are more inclined to make a purchase, particularly when it involves a significant expense. Such services allow customers to spread out the cost of an item over a period of time, which helps alleviate the initial price shock.
Instead of making a single transaction of $200 with a credit card that accumulates interest, customers find it less daunting to make four, interest-free payments of $50 each.
Buy Now Pay Later services can be a convenient and cost-effective option for consumers who want to make purchases. These providers also prioritize responsible lending and aim to offer reliable services to customers.
They ensure transparency by providing detailed information to consumers about their outstanding balance and how they calculate fees. Additionally, they enforce guidelines for businesses to ensure clear communication about these services to their customers.
With the increasing demand for these services, governments are contemplating implementing new regulations to encourage responsible practices and enhance consumer awareness of the product. Stripe is closely monitoring these advancements to comprehend the potential impact on consumers and businesses.
Do customers or businesses pay more when using buy now, pay later?
In most cases, customers do not incur additional costs when they opt for buy now, pay later payment options. Furthermore, the price of a product or service remains the same when using a buy now, pay later service.
For instance, if a product is priced at $100, the customer will still pay $100 to the selling business. However, there might be processing fees associated with businesses that offer buy now, pay later services. The specific cost of using a buy now, pay later service will vary depending on the provider chosen.
How do I set up buy now, pay later for my business?
It is easy to set up payment methods for your business that allow customers to buy now and pay later. After choosing a buy now, pay later provider that suits your business objectives, you will probably have to go through an application process where you provide information about your company.
Another option is to directly integrate with a software provider to make implementation quicker and more user-friendly. For instance, if you choose Stripe, once your application is approved, their team will assist you in integrating the buy now, pay later service into your website, enabling you to offer this payment option to your customers.
I find the rise of Buy Now Pay Later services to be quite interesting. It’s convenient for customers to be able to make purchases without having to pay the full amount upfront. However, it’s important to be cautious and assess your ability to make the monthly payments to avoid negative consequences for your
I have been using the Buy Now Pay Later option for my online purchases and it has been really convenient. It’s great to be able to split the payment into installments without any extra charges. However, I will make sure to be cautious about my ability to make the monthly payments and not let it negatively impact my credit score.
I found this article helpful in understanding the process of setting up buy now, pay later payment methods for my business. Integrating with a software provider like Stripe seems like a convenient option.
I found this article very informative and helpful in understanding the different Buy Now Pay Later options available. It’s good to know that some options offer interest-free payments and no additional fees if payments are made on time. I also appreciate the alternative suggestions for financing, such as 0% interest credit cards and small personal loans. Overall, this article provides useful information for making informed decisions about payment
I found this article very helpful in understanding the different Buy Now Pay Later options available. It’s great to see that some of them offer interest-free payments, but it’s important to make sure to make payments on time to avoid any fees or penalties. Exploring alternatives like 0% interest