Buy now pay later - is your business on board?

There are so many reasons for the growth of Amazon. An extensive product range, free same or next day delivery, huge and ongoing investment in its website, great customer service and easy returns — they’re all central to its offer. But while they all make for an enticing experience, it’s the buying process — the ease in which payments are taken — that is just as critical to Amazon’s ongoing success.

With a clear and fast step-by-step process, or the one-click ‘buy-it now’ button for taking card payments, Amazon has really refined buying.

A new option

But apart from cards, there is another payment option that Amazon offers: the spreading of cost over several months.

Used by many retailers, not just Amazon, it’s known as ‘buy now pay later’ – BNPL. It’s an unregulated instalment payment option, invariably with no hard search run on a credit file, that seeks to make products more affordable. And it does this through offering interest and charge free purchases if payments are made on time.

BNPL is, understandably, especially popular during holiday seasons when the need to purchase doesn’t necessarily marry up with income.

Apart from Amazon’s own ‘private’ form of BNPL, there are plenty of other providers such as Klarna, Clearpay, Laybuy, and PayPal.

The concept of BNPL has enjoyed explosive growth in recent years. As ‘The Guardian’ highlighted last October (2021), UK consumers spent more than £4bn using BNPL and an estimated 7.7m Britons have significant balances that average £538 for each borrower.

Labelled ‘the future of millennial finance’, it’s very popular with the under 30s and those on tight budgets. So, what started with fashion and make-up is rolling out to bigger ticket items such as home electronics and appliances; it’s estimated that by 2026 this form of finance could be worth £40bn a year.

Retailers, it appears – noted The Guardian – “happily pay lenders generous commission in return for those higher sales. [An] investor said double-digit commission rates were not uncommon in the industry. For lenders, handling payments has shifted from a cost centre to a profit centre.”

But BNPL isn’t without its problems.

There’s a growing concern in official circles that the unregulated nature of BNPL is causing problems for many later on down the road. Some, it appears are racking up BNPL debts that they cannot afford; those failing to keep up with the original interest free period are now accumulating charges or, in some cases, seeing the health of their credit file impacted with loans or mortgages being denied following debt collection action. Notably, mid-February (2022), TransUnion said that from Summer 2022, BNPL transactions will start to appear on credit files. This move could work two ways — it’ll record missed payments and conversely, will help those with ‘thin’ credit files build up a credit profile by making consistent payments.

In the UK, the FCA published the ‘Woolard Review’ in February 2021 that examined the market. Among its many conclusions and recommendations, Woolard proposed regulation of this form of finance to help the one in ten that is in arrears.

But these problems aside — which, after all, may be down to individuals not understanding the consequences of their actions — BNPL does have the potential to be a very valuable tool for retailers looking to enhance their popularity among the buying public.

The benefits of BNPL for retailers

It’s important to remember that the whole point of BNPL is to promote a frictionless buying experience for customers; the more ‘stop’ points that there are encountered in the buying process, the greater the likelihood of a shopping basket being abandoned. 

For retailers, BNPL offers a way of selling more goods while being paid up front — all with protection from repayment risk and fraud.

BNPL opens doors to more customers, especially to those that do not possess a credit card. In fact, BNPL is a very convenient way to access financing; there are no separate application forms, no application fees, and minimal additional processing time, and most providers have simple-to-understand repayment plans and terms; customers can buy with ease in just a few clicks after first registration.

Another feature of BNPL is that ability for consumers to ‘try before they buy’; certainly, for fashion, shoppers like to feel the cut of clothing and see if shoes fit before they commit. BNPL offers a great chance to make this type of sale work.

And as is obvious, the ability to spread cost — especially if interest free — is a wonderful sales conversion tool which makes customers more likely to make a purchase, especially a large one, if they can pay over time; it’s the reason why interest free credit appeared a few decades ago. But in contrast to that, as before, BNPL is both interest-free and carries no hard credit check.

It shouldn’t surprise that those offering BNPL invariably see their average order value boosted as additional items appear less expensive as the extra cost is spread.

In practical terms, the consumer shops as normal. But when they get to checkout, alongside traditional payment options like credit/debit card and PayPal, they’ll also, for example, see a ‘Pay with Klarna’ button. A quick eligibility check is run, often in the form of a surface inspection of the shopper’s credit history, and the BNPL provider will either approve or reject the customer.

Choosing a BNPL provider

The question for retailers, then, if they want to offer this form of finance, is which BNPL provider to choose? The answer to that will depend on what is sold, its price, and the seller’s customer base.

There are several considerations:

Terms — BNPL providers, like banks, offer different products with different repayment periods from weeks and months to years. Those selling higher value goods will do better with a provider that offers payments over six or more months.

Credit limits — Just as customers carry different repayment risks and therefore different credit histories, so some BNPL providers operate minimum and maximum credit limits. This means, by definition, tying up with a provider that can offer customers enough credit for a purchase to be made.

Customer location — For those selling beyond the UK, multiple BNPL providers may be needed as some operate in certain markets but not others. Klarna operates, for example, in much of mainland Europe, Australia and the US; Afterpay (known as Clearpay in the UK) covers Australia, Canada, New Zealand, UK, US only.

A simple comparison

While there are multiple providers of BNPL finance, we can see how the concept works by looking at just two.

Starting with Afterpay, it allows customers to break up payments into four interest-free nstalments over six weeks. The sale does not require any credit check (not even a soft credit check) during the sign-up process. Afterpay sets initial spending limits for new customers that may increase over time. Retailers get paid within days, while Afterpay takes on the risk of chargebacks and fraud. Daily settlement reports are available that can be used to either verify or reconcile orders.

Klarna, on the other hand, offers buyers more variety with four different ways for customers to pay with Klarna.

Instalments, which lets customers split the cost of their purchase into three monthly instalments; Pay in 30 days, which permits customers time to place orders and try products before paying in 30 days; Financing, where higher priced items can be paid for over 36 months; and the newly (late January 2022) launched Klarna Visa card which can be used for purchases with 30 days to pay. There’s also a one-time use virtual card that expires after 24 hours if unused, that can be used with online stores. The Klarna card offers users a free 10-day ‘snooze’ feature if they need more time to pay.

Klarna too accepts full fraud and credit risk linked to customer purchases. It pays sellers within three working days.

As for costs, they vary according to provider and deals negotiated, but apart from a set-up fee and monthly subscription, sellers can generally expect to be charged between 2 and 8 percent of the payment processed, in addition to a small, fixed amount. It’s true that BNPL providers charge more than card payment providers, but retailers providing BNPL find that it does entice shoppers to spend. And this leaves retailers with the conundrum when considering the addition of BNPL versus the costs — are they better off with 90 percent of something or 100 percent of nothing?

Integration with ecommerce

As to how the systems are integrated with existing ecommerce systems, Clearpay says that it will integrate with many platforms such as Shopify, Wix, Magento, and Stripe. Clearpay also notes that where its systems do not currently connect to an ecommerce system that it can offer bespoke options for businesses with access to developers.

Klarna offers a “complete checkout solution” that can be branded, and which features one-click purchasing after the first purchase has been made. It handles onsite messaging, the pre-filling of billing address fields, and accepts all major payment methods.

On integration, Klarna says it’s available through many e-commerce platforms and can be integrated directly to a site. It also offers integration guides for developers.

To an extent, anything that helps retailers generate more revenue is a good thing. While there are risks with some shoppers spending more than they can afford, it looks like BNPL is going to see regulation in time. However, for the moment, BNPL is an option that retailers cannot not afford to sign up to; if they don’t, they’ll lose out to rivals that have done so.