Flexible, accessible and cheap to access, there are many advantages to Buy Now, Pay Later (BNPL) for consumers. But what about retailers?
In this article, we take a deep dive and explore the benefits of Buy Now, Pay Later for consumers and merchants.
What is Buy Now, Pay Later?
Buy Now, Pay Later, or BNPL as it’s commonly known, is a form of consumer credit. BNPL allows consumers to buy and receive goods or services immediately and spread the payment over a short period.
It’s mostly used for goods up to £250 in value. There are usually no fees unless a payment is missed, at which point consumers may be charged late fees.
The most well-known BNPL providers offer products called Pay in 3 and Pay in 4. These allow consumers to pay back the cost in three or four equal instalments. The first payment is made immediately, with the rest due every two weeks until the balance is cleared. This usually takes around six weeks, although some providers allow repayments to be made monthly bringing the total term up to 12 months.
Buy Now, Pay Later has been around since the 1800s (though consumer credit has been available for much longer). Merchants would use BNPL to make furniture and farming equipment more affordable to customers to boost sales. Today, it’s used for pretty much anything you can think of.
Read more: What is checkout finance?
How does the Buy Now, Pay Later business model work?
There are at least three parties in any given Buy Now, Pay Later transaction – a merchant, the lender and the consumer*.
The merchant partners with the lender-provider to offer BNPL loans at the merchant’s checkouts. The lender charges the merchant an initial setup fee, monthly licensing and marketing fees, and a percentage fee for every transaction – usually somewhere between 2% and 8%.
In return, the merchant can offer its customers BNPL as a payment method to spread the cost of their transaction.
Every BNPL transaction is a credit agreement between the customer and the lender. The lender pays the total amount of the transaction (minus any deposits paid by the customer at the time of purchase) to the merchant, and the merchant gives the customer their goods. The lender then collects the rest of the cost from the customer.
*Where the lender is not also a technology provider, there is an additional party involved – the platform provider. This is common in white label solutions, wherein the platform provider connects the merchant to a lender. For simplicity’s sake, we will focus on the traditional model here.
What are the benefits of Buy Now, Pay Later for consumers?
Now let’s look at what’s in it for consumers.
Increased purchasing power
BNPL programs allow consumers to make larger purchases than they would be able to afford upfront. A fraction of the total cost is paid as a deposit (though deposits are not always required) and the rest of the cost is spread over time. The customer has more cash available in the short-term, which they can spend on more items or more expensive goods.
Good for those with a thin credit history
Accessing traditional forms of finance like loans and credit cards can be challenging for young consumers, who often have little to no credit history. Buy Now, Pay Later loans are small and credit checking is therefore more relaxed, giving consumers with a bad or thin credit history access to credit they may be refused elsewhere.
Credit where it’s needed
BNPL can also be found exactly where consumers need it – the point of sale. No need to spend days or weeks waiting for approval to come through the post, credit is accessed and approved at the retailer’s checkout at the time of the transaction.
Deposits, repayment periods, and the ability to manage one’s finances at little to no cost at all make BNPL an incredibly useful tool. In fact, in a recent survey by Divido, 58% of consumers said they felt BNPL could help them to better manage their own finances.
Zero interest and fees
Most BNPL programs offer interest-free financing or no fees if payments are made on time. Some even go as far as penalty-free late payments on loans.
Read more: What’s the difference between Buy Now, Pay Later and Short-term Interest-free Credit?
What are the benefits of Buy Now, Pay Later for merchants?
And here’s how this translates into benefits for merchants.
Let’s say a customer is in the market for a pair of trainers. They want to spend £70 and right now they have £50 saved up. They start browsing, looking for something they could buy once they have the extra £20. They go onto your website, see the trainers they want, and notice that BNPL is available. Since they can spread the cost of a £70 pair into three interest-free instalments, and only pay £23 today, they make a decision to purchase them there-and-then.
Voila. You have just turned a browser to a shopper with a little help from BNPL.
Reduction in cart abandonment
70% of carts are abandoned in online shopping, sometimes due to a poor user experience, other times because customers second-guess their decision. It’s one of the biggest pain points for online retailers. BNPL can reduces cart abandonment rates – in fact, 50% of consumers agreed they would be more likely to complete their purchase if they knew finance was available.
Better customer experience
Happy customers become brand advocates. Give them a great experience, and they will tell their friends, return to your store, follow you on social media and write good reviews about you online. BNPL improves your customer experience, helping you to build brand advocacy, and potentially gaining you new customers for life.
Budgets go further, so consumers can afford to add the matching footstool to their new sofa, or a pair of headphones with their laptop purchase. The reduced upfront cost gives more purchasing power, which leads to bigger baskets. In our survey, 54% of customers agreed they would be more likely to spend more if they knew BNPL was a payment option.
Access to new customers
Reducing the upfront cost of your items makes them more accessible to individuals on lower incomes. A £200 chair is out of reach to most people, but three instalments of £66 is less so. Instalment payments means more customers can buy your items, which means you’ve got a whole pool of customers to sell your products to.
Our own research suggests 76% of large UK merchants have already implemented some form of checkout finance programme, be that Buy Now, Pay Later or another retail finance product. This gives them a distinct competitive advantage over those who don’t offer it, for all of the reasons we’ve listed above.
Improved cash flow
Biggest baskets, greater transaction volumes, more sales… Whichever way you spin it, Buy Now, Pay Later brings in more money for merchants. And because they’re paid in-full by the lender at the time of purchase, that translates to more money, better cash-flow, and a stronger business.
Are there alternatives to Buy Now, Pay Later?
Absolutely. In fact, Buy Now, Pay Later is just one form of payment that falls under the umbrella known as ‘checkout finance’.
For bigger ticket items, Short-term Interest-free Credit or Interest-bearing Credit, also known as retail finance and point-of-sale finance, provides the benefits of BNPL but for a far wider range of goods. Interest-free finance is available for transactions up to £25,000, which can be spread over periods up to around 3 years. Interest bearing finance is available for goods of a similar price up to 10 years.
The mechanics are more-or-less the same, as are the benefits. Merchants pay lenders a transaction fee, who loan the cost of the purchase to the consumer for their items and pay the merchant in full. But loans are provided by established financial institutions. Think Tier One banks and specialist consumer lenders.
Larger loans mean more stringent credit worthiness checks, but the characteristically seamless checkout experience is the same. As such, checkout finance is better suited to higher-value sectors. Luxury retail, home improvements, electric vehicles, healthcare and outdoor sporting equipment, to name a few.
Don’t miss: How does Buy Now, Pay Later compare to other forms of finance?
Want to learn more about the benefits of Buy Now, Pay Later?
Divido’s latest white paper offers never-before-seen insights into the world of checkout finance. Understand how and why customers are flocking to this form of payment, with real statistics backed up by our survey of British consumers. Download your free copy here: