The concept of instalment payment plans is nothing new. Businesses selling items like furniture, cars, and electronics have long allowed customers to pay off major purchases in instalments. Today, Buy Now, Pay Later (BNPL) financing offers a more flexible and budget-friendly approach to both online and in-store payments.
The growing trend of Buy Now, Pay Later
Buy Now, Pay Later financing is on the rise and showing no signs of slowing down. According to a new report by Juniper Research, BNPL payments will account for approximately 24% of all global e-commerce transactions by 2026–up from a meager 9% in 2021. Over the past few years, BNPL has transitioned from a niche payment method to one of the fastest-growing finance trends. This rapid growth can be attributed to increased merchant adoption, changes in consumer spending habits, BNPL’s flexibility, and multi-channel application.
A major contributing factor to the surge in BNPL transactions is its widespread popularity among the younger generations. No thanks to their tedious application processes, strict requirements, and high-interest rates, traditional financing options like credit cards are simply unattractive to this new generation of digital-savvy consumers. Consequently, millennials and Gen-Z shoppers are replacing credit cards with low-commitment, no-interest, and more user-friendly alternatives, such as the Buy Now, Pay Later payment method.
How it works
Buy Now, Pay Later financing allows consumers to make purchases and pay later in interest-free instalments. This financing option involves three entities–the merchant, the buyer, and the BNPL provider.
When a customer chooses the BNPL option at checkout, they will be required by the provider to fill out a short application form, requesting details like their name, address, phone number, and Social Security number. The provider performs a soft credit check and approves or denies the application within seconds. If approved, the customer makes a small upfront payment, usually worth 25% of the overall cost. Then, the BNPL provider pays the merchant in full (excluding fees), and the customer pays off the remaining amount to the provider in a series of interest-free instalments.
For example, let’s assume that your customer chooses to finance a $100 purchase using the Buy Now, Pay Later option. If the provider charges a 5% fee, it will pay you $95 for this transaction and collect $100 from the customer over time.
Benefits of offering Buy Now, Pay Later
As an e-commerce merchant, offering Buy Now, Pay Later holds numerous benefits for your business.
Customizable payment plans
Buy Now, Pay Later services allow you to offer your customers customizable payment plans. With BNPL, customers can choose several repayment options, including three interest-free instalments monthly, four interest-free instalments bi-weekly, monthly payments for up to 36 months, etc. This way, your buyers can choose an option that they find the most convenient and complete payments at their own pace.
Increased consumer spending
An online study commissioned by PayPal found that customers are 64% more likely to complete a purchase when offered interest-free payment methods like BNPL. Buy now pay later encourages customers to spend more than they usually would since they won’t have to pay the full purchase amount immediately. By allowing customers to spread payments over time to fit within their budget, it eliminates the barrier to larger purchases, leading to higher average order volumes and a higher frequency of purchase.
New customer acquisition
Buy Now, Pay Later can boost your business’s customer acquisition rate. It lowers the entry barrier to completing a purchase and encourages customers that may have not been swayed otherwise to patronize your business. Offering this option especially attracts millennials and Gen-Z customers, who are wary of traditional banking services. It also improves the overall purchase experience of newly acquired customers, which boosts customer retention.
Before deciding to offer the Buy Now, Pay Later option, it’s important to weigh the benefits its offers against its risks. One of the biggest concerns is the high merchant fees attached to BNPL transactions. Merchants pay BNPL providers anywhere from 1.5% to 8% of a customer’s overall purchase amount, while most traditional payment methods like debit and credit cards charge only 1% to 3%. Although many business owners find that the increased order volume cancels out the extra fees, it’s still necessary that you consider the additional cost when making your decision.
Besides the high merchant fees associated with BNPL, integrating the financing option in your checkout process may not exactly be a walk in the park. It requires some tools and technology that often come at an extra cost to your business, and you may also need to hire an e-commerce website developer to assist you with the setup.
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