Buy now, pay later guide for merchants

Customers increasingly love buy now, pay later services, but what does it offer merchants? Maybe more than expected.

BNPL payments are growing, particularly among younger internet users. They account for 7% of e-commerce transactions, according to our research. We estimate this share will increase by 4% each year through 2027.

• Find more valuable insights like this in Worldpay's Global Payments Report.

This guide will explain not only how BNPL services work, the costs involved and the other factors you should consider before implementation, but will show how BNPL can deliver increased sales, higher average order value and a competitive advantage.

What is buy now, pay later?

Buy now, pay later sums up exactly what BNPL offers. It’s a short-term financing option that allows consumers to make a purchase immediately and defer payments to a later date. The balance is typically split into smaller payments to help spread the overall cost. BNPL functions like an installment plan; the customer usually is not charged for the cost of the loan.

Buy now, pay later transactions involve three parties. The customer making the purchase benefits from flexible payments. Financiers provide the credit service. The merchant receives upfront payment on behalf of the customer.

Intelligent system design makes the BNPL payment process seamless – for both merchants and customers.

How does it work?

Accepting buy now, pay later payments from customers is straightforward:

1. BNPL sign-up: The retailer signs up for an account with a buy now, pay later provider like Klarna or PayPal. There will likely be an account setup charge payable during registration.
2. BNPL integration: The merchant adds BNPL buttons to its e-commerce checkout. This gives customers another payment option alongside existing methods (e.g., credit card, PayPal, Apple Pay, etc.).
3. Customer eligibility assessment: When a customer selects buy now, pay later, the BNPL provider performs a soft credit check to assess eligibility. The process takes a few seconds to verify identity and carry out an automatic antifraud calculation.
4. Checkout complete: If the application is accepted, the customer is returned to the merchant’s website to complete the checkout process and confirm such details as delivery address, etc.
5. Merchant receives payment: When the checkout is complete, the merchant receives payment for the full transaction value from the BNPL provider. There may be a slight delay receiving payment depending on the provider’s T&Cs.
6. BNPL provider manages ongoing payments: The BNPL provider manages the loan balance. It follows up with the customer for all remaining payments. The provider may apply additional charges and interest if the customer fails to make installment payments on time.
7. Merchant pays for the service: The merchant pays the BNPL provider a handling fee for each transaction it facilitates.

Benefits for merchants

Buy now, pay later offers improved convenience for the shopper. However, there are BNPL benefits for merchants too, including:

Payments are received in full

The payment instalment plan is between shopper and BNPL provider. Although the customer can split their bill into three or four payments, the merchant receives the full order value immediately.

This has major benefits, improving cash flow and sales volumes.

Enhanced fraud prevention

Most businesses refuse to extend credit to customers directly because of the risk of fraud and non-payment. With BNPL, providers assume the risk. They protect themselves with robust fraud prevention mechanisms, such as artificial intelligence analysis to identify and reject suspicious applications and transactions.

Some BNPL providers claim that their fraud detection processes are quicker and more effective than those used by traditional banks, providing an additional layer of protection for retailers and customers.

Optimize payment authorization

BNPL payment authorization processes are fast and efficient, adding mere seconds to the checkout process. All the administrative overheads are carried by the provider, allowing merchants to focus on their customers.

When you optimize payment authorization the checkout process is smoother and more enjoyable for customers too.

Increase average order value

Knowing they can spread their payments for big ticket items, customers can purchase more of what they want immediately using BNPL. Further, smaller repayments enable customers to spend slightly more overall, increasing average order values.

Improve customer acquisition

Some customers simply cannot afford the upfront cost of high-end items. The option to spread that cost across smaller payments may help to convert these would-be shoppers.

Buy now, pay later options are particularly popular with younger shoppers. By offering BNPL, merchants can expand their customer base.

Improve conversions

Shopping cart abandonment rates remain high – as much as 70%. With BNPL, merchants can address one of their customers' most important concerns, “I can’t afford it.” Solving that problem will help to improve sales conversions and reduce cart abandonment.

Improve checkout experience

For many e-commerce sites, BNPL is the payment option whose absence frustrates customers. Adding buy now, pay later to your checkout ensures that customers have every available payment option to suit their needs and preferences. In fact, many shoppers now expect to see BNPL offered at checkout.

Should your business offer buy now, pay later?

Buy now, pay later methods are a versatile option that can be used across many industries, but they may not suit every merchant. Most businesses can benefit, however. Here’s what you need to know:

BNPL can provide increased choice, better customer acquisition, retention and sales growth – goals common to regardless of the type of business. Here’s a quick look at the businesses for which BNPL payment methods are best suited – and those which are not.

High-value goods and services

Selling big ticket items delivers sizeable returns, but conversion rates are relatively low – in part because of the initial price hurdle. Adding BNPL to your payment options can solve this problem. In can help to increase average order value, too, because splitting payments allows customers to order more and still stay within their budget.

BNPL is already popular in the high-end electronics, designer fashion and luxury goods markets, allowing greater access to previously exclusive products and services.

Fast-moving and low-value goods and services

Installment plans are not just for high-value purchases. Retailers in fast-moving consumer goods and low-value goods can use BNPL to achieve similar goals, especially in encouraging larger average orders. As previously mentioned, buy now, pay later functionality can reduce cart abandonment rates, particularly for customers who may not be able to afford their full order immediately.

BNPL offers a route to reach a new customer base – those without access to traditional credit. Anyone unable to pay a full purchase amount upfront can still shop with FMCG retailers. Supermarkets, homeware vendors and other smaller e-commerce stores could all potentially benefit from implementating BNPL.

It's also worth noting that BNPL options can be added to in-store checkouts, too (more below).

B2B transactions

Business-to-business BNPL does not yet exist. Buy now, pay later providers are purely consumer-focused, conducting soft credit searches and extending loans to individuals. Companies that provide goods and services for sale to other businesses must rely on alternative credit and payment methods. Most B2B customers will pay through such traditional routes as business loans or bank overdrafts.

Subscription-based businesses

Buy now, pay later services are optimized for individual purchases, allowing customers to spread the cost of a single transaction over time. The model does not lend itself to subscription-based services that rely on recurring billing. This means that subscription-based apps, magazine publishers or gift-box vendors cannot offer BNPL options.

Setting up buy now, pay later

BNPL is easy to use – and easy to set up, both for online and in-store purchases.

Online, merchants simply use the provided front-end integrations to add a BNPL button to their checkout. This will be the same process as adding other options, such as Apple Pay, Google Wallet or PayPal. Online retailers who use hosted payment gateways may find that their host will add BNPL services for them.

For brick-and-mortar retailers, adding BNPL options to POS terminals will be like adding new payment card types. Depending on your setup, you may need to integrate directly with the BNPL provider. Alternatively, your POS provider may perform the upgrades on your behalf, making the process completely pain free.

Conclusion

As you have seen in this guide, BNPL services offer many benefits for businesses and their customers. From greater choice and improved budgeting to increasing the pool of potential customers and average order value, most businesses should consider offering BNPL as a payment option.

However, with a range of BNPL providers to choose from, you must carefully consider your options. You may find some are not as well suited to your industry as others or that the transaction charges from some providers are outside your budget. It’s also worth checking whether a particular service can be integrated with POS terminals if you operate brick-and-mortar stores.