Buy Now, Pay Later: Does BNPL Strategy Work for Businesses?


Aug 25, 2022


8 min read

Sixty-seven percent of Gen Z respondents to a Statista survey the same year reported using a BNPL service during the previous three months. Buy now, pay later is a convenient and popular way to shop for a broad variety of goods and services. Mozo found that among Australians who are already utilizing BNPL services, 67% are buying needs like furniture and household appliances, 57% are buying luxury items like designer apparel and jewelry, and 27% are buying basics like food.

A second payment method that firms might use is the “buy now, pay later” model. When they make a purchase, they may get their hands on it right away, and they also have the option to spread out their payments. Also, customers can feel more at ease purchasing an expensive item like luxury apparel or furnishings if they can spread out their payments over time. By allowing customers to make installment payments, you may be able to enhance both sales and client loyalty. A purchase now, pay later option can help customers whose budgets have been thrown off by the spread of COVID-19.

History of how BNPL became so popular

Let’s go back to the beginning of BNPL to learn more about its history and how it got to be what it is now. Many of these warehouse stores have also experimented with layaway and other payment plans in the past.

The widespread adoption of credit cards has led to the demise of these alternatives. Many stores now provide their own credit cards and actively encourage their use at the point of sale as a means of boosting customer loyalty and increasing sales.

Key features of BNPL, according to researchers, are lower transaction values and the absence of a credit check or conventional underwriting. This debt is unavailable to creditors because BNPL services do not report user activity to credit bureaus.

In most cases, a 25% down payment is required at the time of purchase, with the remaining 75% divided into three equal installments due every two weeks. The buyer must authorize automatic payments using a debit or credit card in order to complete the BNPL transaction.

A definition of “Buy Now, Pay Later”

With Buy Now Pay Later, a client may make an immediate purchase and then pay for it in monthly payments over a short period of time. In essence, you will be granted a short-term loan, the whole amount of which must be repaid either in monthly installments or in a single payment. If you repay the loan on time, you won’t have to pay any interest.

Though yet in its infancy, BNPL’s promising future is assured by its rapid development. Online purchases are a common reason that borrowers seek out these sorts of loans. The speed with which loans may be approved sets it apart from more traditional approaches. As long as you don’t postpone payments, it won’t have any effect on your credit score, which is still its largest perk.

There is a plethora of BNPL service providers in India. Mobikwik, Amazon, Simpl, PayPal, Alibaba Postpaid, and Paytm Postpaid are all part of the group.

Nonetheless, at this point, you’re probably wondering how BNPL makes money. Exactly how does BNPL function? It’s finally here.

Explaining the Operation of BNPL

Read on to learn how the BNPL system benefits both shoppers and stores.

  • The shopper continues shopping as usual and proceeds to the checkout counter. BNPL begins the same way that every other online purchase does for the buyer. You go to several internet retailers, choose items, and get ready to check out.
  • The BNPL provider the store has selected offers a buy now, pay later payment plan. The consumer can pay with BNPL, along with other payment methods like credit cards, at checkout.
  • The borrower’s credit is given a “gentle pull” by the lender. When a consumer chooses to pay using BNPL, they must provide the BNPL lender with basic identifying information (such as a full address and Social Security number). In order to ensure that the borrower would repay the loan, the lender does a mild credit check right away. Since this form of credit check is not shared with credit reporting agencies, it will not have a negative impact on credit ratings.
  • The store must pay a fee to the BNPL provider. The BNPL provider will deduct a fee from each sale made at retail and pass the cost on to the store owner. Fees (usually 2-8%) are withheld from the amount the BNPL lender transfers to the retailer. This is analogous to the partnerships between banks and shops that enable the use of credit cards.
  • The consumer makes payments against the outstanding debt. In most cases, BNPL sellers may waive interest charges entirely if you pay off your debt in a very short amount of time (typically 30 days). Lenders often provide a variety of payment plans, each with its own set of terms and interest rate, to clients who may require additional time to repay the principal. As is the case with credit cards, the consumer will save money on interest charges if they pay off their balance quickly.

Where do BNPL businesses get their money?

The next obvious question is, how does BNPL make money? Who or what is providing the funding?

Earnings via retailers:

BNPL provides a platform for businesses to expand their clientele and hence their revenue. As a result, customers with low balances can still make purchases. Additionally, it provides a new method of vendor compensation. As a result, they will be charged a transaction fee of 2-8% of the total purchase price. This raises a red flag for the sellers who are footing the bill for the hefty transaction costs, but the rising average order size speaks for itself.

Obtaining Funds from Customers:

  • Interest-

BNPL’s clientele are a significant source of revenue. Depending on the customer’s credit or the length of time before the balance is paid off, some businesses impose interest rates anywhere from 10% to 30%. The borrower is responsible for paying interest on the loan if he or she extends the loan’s repayment term. However, there are a select few businesses that will not assess any fees so long as the loan is repaid on time.

  • Payment postponement –

The client is responsible for the late fees if the payment is not received by the due date. It is a major source of income for BNPL enterprises. It’s possible to accrue interest at a rate of 30% or more. It is the penalty for late payment, even when the consumer pledges to reimburse the remaining amount promptly.

They are also interested in developing their own online marketplaces in order to generate revenue. This will allow them to boost their earnings by encouraging customers to swipe their cards more often. As a result of referring clients to their business partners, they might collect a commission.

Another significant revenue stream comes from the display advertisements they host. There are several brands that use ads to boost their credibility and sales. Inevitably, there is a cost associated with running this ad. In exchange for advertising space, these companies are paid by the brands that advertise on their site. Many still have not subscribed, thus the money from this source is low.

Earning money from data is the way of the future. They now have access to a wealth of personal information about you that might generate income for them in the future. This information is extremely valuable and might be transferred for monetary gain. They may put that money into expanding their business in the future.

Now that we’ve covered BNPL firms’ primary income streams, it’s time to learn about BNPL’s benefits.

What are the benefits of “buy now pay later” for business?

It may be hard for you to see how accepting this kind of payment will benefit your company. That’s hardly surprising, considering the prevalence of layaway plans in retail sectors. Here are four benefits that should help you see how this payment method may be used in a business-to-business setting:

Reduce cash flow stress as much as possible.

If most of your cash flow is already being spent, it may be impossible to pay for new or used equipment right once. Services that allow you to make a purchase now and then make a payment at a later time can help you better manage your finances. Smaller payments can be made starting after the selling date, rather than all at once. If the equipment can be put to work generating more money, then it more or less pays for itself.

Second, don’t use up all of your available finance options.

Do you prefer not to use your available credit at the bank? Do you wish you didn’t have to use all of your company’s credit? You can think of BNPL as a distinct line of credit from your other options. In this way, you won’t have to worry about draining your credit account in order to get the necessary tools.

Third, think about arranging a special payment plan.

Do you think it would benefit your company if you could finance machinery with no money down and only interest to pay for the first six months? Instead, how about a payment plan that adjusts with the seasons? With BNPL finance, there are several flexible payment options for business-to-business transactions. The sellers and their partner lenders may surprise you with their willingness to negotiate.

Fourth, shop with complete ease.

There are a plethora of BNPL system sites readily available on the web. In addition to checking out items, making automated payments, and downloading data for internal reporting are also options. Inquiring about the seller’s ability to offer financing at a later date never hurts.

After nearly two years of navigating the effects of global economic volatility, many small businesses are on the road to recovery. But most decision-makers are aware that they require the proper equipment to do the job and bring in money. If your business is ready to take the next step but needs a financial bridge, buy now, pay later services might be the solution.

Is BNPL the Best Option for Your DTC Company?

In recent years, the option to finance purchases with delayed payment has skyrocketed in popularity, and it’s not expected to disappear anytime soon. As more and more vendors provide this choice, not providing it might put a store at a competitive disadvantage.

You should thoroughly research your potential BNPL provider and make sure you have the funds available before committing to using BNPL for your company. Verify that the supplier you’re thinking about will work well with your present sales infrastructure.