What Is Buy Now, Pay Later (BNPL)? How does it work?

What do you think about the concept of Buy Now Pay Later? Is it a 2023 trend or an age-old concept?
FTB News DeskFebruary 28, 202310 min

First created decades ago, the concept of Buy Now Pay Later (BNPL) is the idea of consuming goods and services first and then paying post-consumption. It is not something new in society– in fact, it has been trending for years at local restaurants and eateries. Shopkeepers or owners practice this in a form of a ledger entry for every individual that would buy things and then collect the compensation at the end of every month. For this, the payee would diligently record all the purchases and send over the details. Individuals can tally them and return products that are not relevant while paying for the rest. 

But one question that comes to mind is how it works on a larger scale and does the payee lose money on the interest by not getting the money immediately?

Before we move on to answer this question. Let us check a few quick facts.

  • Almost 10 percent of eCommerce transactions in Australia are paid using BNPL.
  • BNPL proved to be the fastest-adopted payment method in India and UK in 2020.
  • More than half of US customers prefer to use BNPL services.
  • It is estimated that BNPL will account for 12 percent of total global eCommerce spending by 2025.

Well, the facts show that BNPL is quite popular among customers across various countries. So what exactly is BNPL? 

Buy Now Pay Later abbreviated as BNPL is an alternative digital payment method that permits customers to purchase goods and services without committing to the full payment upfront. By doing so, customers will get the leverage to immediately finance their purchases and pay them back in fixed installments over time. For example, a customer making a $1000 purchase gets the leverage of paying back in say four interest-free installments of $250. 

These services are widely used by businesses, especially eCommerce retailers in order to increase conversion, and average order value while also reaching new customers. It is reported that businesses that use BNPL services have a 27 percent incremental uplift in sales volumes. 

So let us look at how this service works.

BNPL is typically presented as an option in the payment flow along with other payment methods like credit cards and more. When customers wish to make one-time purchases they can simply opt for BNPL and they are redirected to the provider’s site or app in order to create an account and log in. They can choose whether to accept the term of the repayment plan by selecting the duration of the installment like bi-weekly or monthly. Once the procedure of the purchase is complete, businesses receive the full payment upfront from the BNPL service provider and customers pay their installments directly to the provider. The process takes place with zero interest or additional fees if the payment happens on time. 

Having such a quick, effective, and easy payment process; let us look at some of the benefits of BNPL.

  1. Reach More Customers:

    Businesses that offer a variety of payment options can create a relevant and familiar payment experience, helping them attract more customers.

    BNPL is famous among the young generation who particularly do not have credit cards. BNPL services have established marketing channels like shop directory and email marketing which provide additional opportunities to businesses in reaching more customers.

  2. Increase Conversion: It is psychological that customers make bigger purchases if they get an option of repayment later, especially in installments. This payment method helps reduce sticker shock meaning it’s less intimidating to pay smaller interest-free payments than making the entire payment all at once. 
  3. Offers Better Customer Experience: BNPL services offer better payment options as it is faster and a more convenient way of accessing funds. In this payment method, customers are only subject to soft credit checks versus hard checks for other financial services. It does not cater to the additional process of extra application and application fees but rather works on simple-to-understand repayment plans and terms. 

So after checking the benefits let’s move on to whether customers or businesses end up paying more when using Buy Now Pay Later. Generally, the cost of products and services does not change. However, there can be a small processing fee associated which entirely depends upon the service provider. 

Wrapping Up

The concept of BNPL is the right intersection of two things–credits and payment but without or with less interest fee. BNPL service helps make payment which is reliable, quick, and at a cost that customers are willing to pay. The one who can master this service would likely become a large NBFC in the near future challenging today’s bigwigs. And such small players who are equally inclined to ‘tech’ and ‘fin’ will sustain in the long run.

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FTB News Desk

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