For the better part of a century, customers had two main options when it came to purchasing an item on credit from their favourite stores. The first step was to charge the purchase to a credit card. The second option was to use a layaway programme, which allowed them to reserve an item at the store, pay for it in instalments, and then pick up the merchandise once it was paid for.
Credit cards have a strong hold on the market today—79% of the US population has at least one in their wallet—but layaway plans are becoming obsolete. They are being phased out in favour of a new payment option: buy now, pay later (BNPL) programmes administered by third-party credit specialists. While retailers do not get to charge interest to customers who use BNPL (in fact, the BNPL vendors charge them a fee), they make up for it in increased sales volume. BNPL has also contributed to credit market equality. It is gaining popularity among those who do not typically purchase items with a credit card for a variety of reasons.
What is the meaning of buy now, pay later (BNPL)?
A buy now, pay later plan (BNPL) is a loan provided to a customer at the point of sale to allow them to purchase merchandise on credit but without the use of a credit card. Shop Pay Installments from Shopify, Affirm, Afterpay, Sezzle, PayPal, and Klarna are all popular options. Many will perform an instant soft credit check on the customer (the type that does not affect your credit score) before releasing funds for a point-of-sale loan. Customers can pay off their loan balance in a variety of ways, depending on the company they use and the amount borrowed; some payment options incur interest, while others do not, and some companies charge late fees or fees for missed payments. BNPL companies may compensate for the lack of interest charged to the consumer by charging a fee to the retailer.
How does the buy now, pay later scheme work?
The BNPL process is explained below for both consumers and retailers.
A typical customer shops and begins the checkout process. As a customer, you begin the BNPL process in the same way you would any other ecommerce transaction. You browse your favourite online stores, choose your items, and prepare to pay.
The retailer's preferred BNPL vendor offers the option to purchase now and pay later. BNPL, as well as other payment methods such as credit or debit cards, will be available to customers during the checkout process.
The customer is subjected to a soft credit check by the lender. When a customer chooses to purchase items through BNPL, they provide some personal information to the BNPL lender (such as a full address and Social Security number). Based on the customer's credit history, the lender immediately performs a soft credit check to ensure that they will repay their loan. Because this type of credit check is not reported to credit bureaus, it will not have the same impact on credit scores as a full credit check.
The retailer is charged a fee by the BNPL vendor. The BNPL vendor will take a percentage of the retail transaction, which will be billed to the retailer directly. The fee (which typically ranges between 2% and 8%) is deducted from the amount remitted to the merchant by the BNPL lender. This is similar to how traditional credit card companies work with retailers.
The balance is paid off over time by the customer. Most BNPL vendors offer interest-free payments if the customer pays off their entire balance within a short period of time (typically 30 days). If customers require more time to pay off their balance, lenders offer various payment plans with varying interest rates. The faster the customer pays off the bill, the less total interest they pay, just like with a credit card.
Customers benefit from four BNPL advantages.
When you use a BNPL service, you may receive several potential benefits.
It's a leveller for those who don't have credit cards. A sizable proportion of customers (about 20%) do not have a credit card, and the majority (55%) of those who do have a credit card have maxed out at least one card. A BNPL service provides many of the same advantages as a credit card, but for smaller, one-time purchases. You can even use a BNPL service as a credit card by requesting a virtual card number ahead of time. This card number will cover the exact amount required to complete your transaction. All of this is done on the BNPL vendor's website or via its smartphone app.
Payment options that are adaptable. Most BNPL services provide customers with options at the point of sale. As a customer, you have the option of paying the entire purchase price with BNPL or splitting it with another payment source (like a debit card).
Payment plans with no interest. You can borrow money without paying interest if you choose a short loan period and make your payments on time.
Soft credit checks have no effect on your credit history. Most BNPL vendors conduct soft credit checks on their clients to confirm their loan eligibility. This, unlike a hard credit check, will not harm your credit score. However, if you are late in making payments to your BNPL vendor, this is reported to credit bureaus, just like if you are late on credit card payments.
6 well-known BNPL services
Retailers like buy now, pay later services because they have been shown to increase overall sales volume. As a result of this retailer preference, more viable BNPL services are available than ever before. Here are six highly regarded alternatives.
1. Shop Payment Plans
Shop Pay Installments is a robust BNPL service provided by Omninos. It does so in collaboration with Affirm and through the same network of lending partners. When merchants use omninos as their ecommerce vendor, they can use Shop Pay Installments to allow their customers to pay their balance in four interest-free instalments while still receiving the full balance at the time of purchase. Shop Pay Installments provides online small businesses with the same BNPL benefits as major retailers, such as higher average order value and lower cart abandonment.
2. Confirm
Affirm is one of the most prominent BNPL vendors, and it is prominently offered as a payment option at major retailers such as Amazon and Target. Affirm charges no interest or fees for short-term loans (four payments separated by two weeks). Longer-term loans necessitate interest payments (ranging from 10% to 30% APR, depending on your credit), but there are no fees. If you shop at a store that does not already work with Affirm, you may be able to use the service with a virtual card.
3. Afterpay
Afterpay was founded in Australia and is now owned by the US-based Block (formerly Square). It is even bigger than Affirm, as it works with over 100,000 retailers. One of Afterpay's standout features is its smart credit limit tool, which calculates a spending limit for customers based on their personal credit history. This should keep them from spending more than they can afford to repay. It also sends out regular payment reminders, and its virtual card service is simple to use. Unlike Affirm, Afterpay does charge late fees, but these will never apply if you make your payments on time. Its interest rates are in the same 10% to 30% range as Affirm.
4. Sezzle
Sezzle is a BNPL with a signature feature that allows customers to push back payment due dates by up to two weeks. Sezzle does require a 25% down payment on all purchases, but most loans can be paid off without paying interest. Sezzle actively seeks out younger users, describing itself as "on a mission to financially empower the next generation." It has over 44,000 retail partners, but it is less popular among the largest retailers (one notable exception is Target, which does offer Sezzle as a payment option).
5. PayPal
PayPal is probably better known as a secure online payment system or as a person-to-person cash transfer app, but it is also a BNPL lender. Its signature lending product is an interest-free service called Pay in 4, which divides transactions into four scheduled payments. PayPal restricts this service to purchases between $30 and $1,500. In comparison, Affirm will lend up to $17,500. The benefit of using PayPal is that it has nearly 30 million active merchant accounts, which means it can be used without the need for additional steps such as applying for a virtual card number. PayPal's standard interest rate is around 24% APR.
6. Klarna
Klarna was founded in Sweden in 2005. It now has over 85 million customers and works with hundreds of thousands of merchants worldwide. Klarna may conduct a soft or hard credit check, depending on the type of borrowing you do. Rather than imposing strict borrowing limits, Klarna employs a proprietary metric known as Purchase Power. Its official website defines Purchase Power as "an estimated amount based on factors such as your payment history with Klarna and your outstanding balance." If you have good credit and a solid payment history, you may be eligible for larger point-of-sale loans from Klarna than from most other BNPL vendors. When you do pay interest, it will be capped at 25%.
Last thoughts
As a retailer contemplating a BNPL option, you must weigh two factors. One example is the fees charged by BNPL vendors on each purchase. The other factor is the increased shopping carts of BNPL customers.
Most BNPL retailers do not make their merchant fees public, but they typically range between 2% and 8% of a customer's purchase amount. This puts them on par with major credit card companies. As a result, accepting BNPL services may be no more expensive for a merchant than accepting credit cards. A BNPL service, like credit cards, can encourage customers to spend more. Retailers ranging from Macy's to Peloton to Rue21 have reported significant increases in sales among customers who use a BNPL service. The increased sales volume more than compensates for the fees paid by these vendors and many others.