Buy Now Pay Later is a form of interest-free, short-term credit that allows consumers to pay for certain goods in instalments or at a later date. It has gained significant traction in the last few years – coinciding with the growing popularity of online shopping and the worsening cost of living crisis.
In this blog, we’ll explain how Buy Now Pay Later works, the ways in which it could benefit your small business, and the reasons why this payment method is so popular with consumers.
What is Buy Now Pay Later?
Buy Now Pay Later (BNPL) is a payment option offered by an increasing number of online retailers. Essentially, it is a point-of-sale loan that allows customers to pay for their goods in one of two ways:
- Pay later – payment in full by a specified date (usually 30 days after purchase)
- Instalments – a small downpayment, followed by weekly, fortnightly, or monthly instalments
No hard credit checks are carried out and it’s entirely free of interest and fees. However, late-payment charges may apply if the customer misses a scheduled payment.
Retailers themselves do not provide the credit. Rather, it’s offered via third-party BNPL companies such as Klarna, Laybuy, and Clearpay.
For larger purchases, some BNPL providers also offer a finance option. This allows customers to spread the cost over a longer period, such as 12, 24, or 36 months. However, this option usually requires a full credit check.
How does Buy Now Pay Later work?
The customer selects the Buy Now Pay Later option at the online checkout.
The BNPL provider carries out a ‘soft’ credit check on the customer and approves (or declines) the purchase. This type of check does not leave a footprint on the customer’s file.
The retailer receives full payment from the BNPL provider immediately (minus commission, which is usually 2-6% of the total sale price, and sometimes a small transaction fee). The customer’s order is then processed and shipped as normal.
Thereafter, the BNPL provider collects payments from the customer on scheduled dates, assuming credit risk for the retailer and the consumer.
If all or part of an order is returned, the BNPL provider cancels all scheduled payments, issues any required refund directly to the customer, and requests the refunded sum of money from the retailer.
Benefits of Buy Now Pay Later for businesses
The United Kingdom is one of the top nations worldwide for the use of Buy Now Pay Later. With over 5 million customers, it is also the fastest growing method of online payment in the UK.
Historically, the BNPL target markets have been Millennials and Generation Z. However, a study by Forbes shows that an increasing number of Gen X and Baby Boomers are starting to favour this interest-free payment option.
We’ve now reached a point where Buy Now Pay Later is set to be the primary payment method for online shopping, rather than the alternative.
So, let’s take a look at the specific ways your business could benefit from offering BNPL.
1. Increase sales
Buy Now Pay Later helps to increase sales, in terms of both the number of transactions and the value of orders.
It provides more power and flexibility to customers, allowing them to budget and manage their cashflow more effectively. This makes goods accessible to a larger number of shoppers.
When it comes to high value items, BNPL can also soften the blow of parting with a large sum of money in one go, or paying high interest rates on credit cards.
So, rather than having to save up, take time to think about it, or abandon their cart altogether, customers are able to buy items immediately and spread the cost over time without paying interest.
2. Improve trust & credibility
New customers are more likely to trust a business that offers Buy Now Pay Later.
Aside from the retailer being checked and verified by the BNPL provider, many people are hesitant to shop with unfamiliar businesses or try new items.
By offering a Buy Now Pay Later option, customers often feel more comfortable trying out a new product or taking a chance on a retailer they’ve never shopped with before.
It reduces consumer risk and commitment because they’re able to try the item before paying for it, or get a hassle-free refund if they decide to return their order.
This peace of mind helps to improve customer experience, build trust and credibility in your brand, and increase the likelihood of repeat custom.
3. Build customer loyalty
Consumers tend to stay loyal to trusted businesses with whom they have previously shopped and who meet their needs.
If they actively seek BNPL payment options, they are more likely to shop with and return to online stores that offer this method.
4. No financial risk
The burden of financial risk is assumed by the BNPL credit provider, rather than the retailer.
When a customer selects the Buy Now Pay Later option, the retailer is immediately paid in full by the credit provider.
The provider then handles all payments from the customer and deals with any defaults, so there is no financial risk to the seller.
5. Attract new customers
Buy Now Pay Later options help businesses to attract new customers across different demographics, from Gen Zs to Baby Boomers.
Increasingly, shoppers prefer the flexibility of being able to buy something when they want it and spread the cost over time, rather than having to save up or pay credit card interest.
For those on a tight budget, BNPL makes products more affordable, especially when it comes to non-essential items and luxury goods that would otherwise be beyond their reach.
By offering a more flexible payment option, new and existing customers are also more comfortable buying on the spot or trying out new products.
6. Remain competitive
Today’s online consumers expect a range of payment options. According to a recent survey by Finder, 9.5 million Brits avoid buying from retailers who don’t offer Buy Now Pay Later options.
A 2021 survey by TRC Market Research also reveals that most shoppers decide how they are going to pay for their purchases before they reach the checkout.
Moreover, offering BNPL options earlier in the shopping journey helps to influence their decision to buy.
These findings highlight just how important BNPL services are to consumers and retailers.
With so many businesses offering this payment option on their websites, customers may shop somewhere else if you don’t do the same.
Top reasons why customers use Buy Now Pay Later
Once a niche form of consumer credit, demand for Buy Now Pay Later exploded during the pandemic. Yet, as we return to normal, enthusiasm for this payment option remains high across all demographics.
So, what is it exactly that customers like about Buy Now Pay Later?
1. No credit check
Rather than running full credit checks, BNPL providers only carry out soft credit checks on customers.
This type of search isn’t reported to credit reference agencies, so there is no impact on the consumer’s credit score or file.
For those with less-than-perfect credit or very little borrowing history, Buy Now Pay Later options help to remove the uncertainty of qualifying for credit.
2. Interest-free credit option
Consumers are becoming increasingly dissatisfied with credit cards, even more so since the start of the pandemic.
At a time when financial stress is on the rise, providers have failed to keep up with customers’ changing needs. As a result, people are turning to alternative forms of credit that better suit their budgets.
Most Buy Now Pay Later methods are interest-free for consumers. This is far more appealing than paying high-interest rates on credit cards.
Customers also know exactly how much they will pay for their purchases, whether they choose to pay later or in instalments.
3. To avoid debt
People are becoming more averse to accruing debt. This is especially true of the younger generations. Consequently, they are staying clear of credit cards and turning toward flexible alternatives like BNPL.
4. Ease and convenience
Buy Now Pay Later is accessed during the checkout process and there’s no lengthy approval process.
It gives customers the freedom to buy products immediately whilst sticking to a tighter budget. This eases their financial burdens and provides a hassle-free shopping experience.
Most BNPL providers also have apps, which make it easier for consumers to purchase goods quickly. They can also keep track of their spending, and manage payments on the go with the click of a button.
5. Ability to spread costs
The pandemic and subsequent cost of living crisis have put a strain on people’s finances. This is only set to get worse as food and energy prices continue to rise.
As a result, more consumers are choosing BNPL payment options to manage their budgets and buy otherwise inaccessible goods.
6. Try before they buy
Online shopping has countless benefits, which is why it’s so popular. However, one of the major drawbacks is that you can’t inspect or try products in person before you buy them.
Let’s say you’re shopping for clothes but you’re not sure which size to order, or you can’t decide between a few different pieces. With Buy Now Pay Later, you can order multiple sizes or items without the inconvenience of paying up front and waiting up to two weeks for refunds.
This option lowers the entry barriers and makes it easier for consumers (especially those on a tight budget) to try more items and take a chance on goods they’re unsure of.
Which types of retailers offer Buy Now Pay Later?
Since January 2020, the UK has seen an almost 2000% increase in online retailers offering Buy Now Pay Later. This consumer financing trend has been implemented by businesses of all sizes in various industries, including:
- Clothing
- Furniture and homeware
- Health and beauty
- Fitness
- Groceries
- Food and drinks delivery services
- Entertainment
- Reading material
- Cleaning supplies
- Children’s goods
- Pet products
- Electronics
- Travel
Regardless of whether your business is new or established and you operate as a small sole trader or a limited company, BNPL is an effective way to boost sales and grow your online business.
Wrapping up
Consumers across all generations are turning away from credit cards toward Buy Now Pay Later payment options. The attraction is simple: shoppers can spread the cost of purchases without paying interest.
With all predictions pointing toward continued growth, this trend presents ample opportunities for businesses to attract new customers, increase sales, and build brand loyalty.
Therefore, if you want to remain on the cutting edge and meet the changing needs of customers, adding Buy Now Pay Later to your online store can only serve to benefit your business.
If you have any questions about this topic, please leave a comment below.
Great blog yet again.
The content produced should incur a fee that’s how useful it is!
Haha, thanks for the comment!
Glad you found it useful.
Kind regards,
The Rapid Formations Team