What is Buy Now, Pay Later (BNPL) and How Does it Work?

The concept of Buy Now Pay Later (BNPL) has been around for hundreds of years. It’s a simple way for people to purchase expensive items and pay for them over time on an installment plan. 

These early forms of layaway eventually evolved into bigger companies issuing private-label credit cards to consumers (like a Macy’s card), which started to gain popularity about 30 years ago.

But the modern version of BNPL is much more sophisticated. It allows retailers of virtually any size to offer installment plan options to their customers without having to issue private credit cards or partner with a big bank.

Lowering the barrier to entry into this space has caused BNPL usage to skyrocket in recent years. Currently, over 360 million people worldwide use BNPL to finance purchases. This represents a $542.9 billion industry—a 552% increase from the $87.2 billion market in 2020. 

Forecasters predict that 900 million people globally will use BNPL services by 2027, and the BNPL market will eclipse $3.27 trillion by 2030.

These staggering numbers are hard to ignore. And as a merchant, you might be tempted to offer BNPL as a payment option to your customers. But before you make that step, you need to fully understand how BNPL works and if it’s really worth it for your business.

This in-depth guide covers everything you need to know about Buy Now Pay Later—including its pros and cons for both merchants and consumers. 

What is Buy Now, Pay Later?

Buy Now, Pay Later (BNPL) is a type of short-term financing that allows consumers to purchase goods or services while paying for them at a later time. Unlike other types of financing, BNPL is typically an interest-free option for consumers.

For example, one common type of BNPL plan is four equal installments over six weeks. 

So a customer could purchase a new couch for $800, get it immediately, and pay the remaining installments on a fixed schedule, like this:

• $200 due today
• $200 due in 2 weeks
• $200 due in 4 weeks
• $200 due in 6 weeks

The merchant receives the full payment of the item upfront from the BNPL service minus the fees imposed by the provider.

How Does Buy Now, Pay Later Work?

Here’s the simplest explanation of how BNPL later works:

1. The merchant or retailer partners with a provider to offer BNPL as a payment option at checkout or point-of-sale.
2. If a customer chooses to pay in installments, they make an initial deposit right away and agree to a short-term payment plan.
3. The BNPL provider pays the merchant in full for the purchase, less fees for providing the service.
4. Consumers are given the goods or services, and the BNPL assumes responsibility for collecting payments.

The reason why BNPL providers are able to offer interest-free financing to consumers is because they charge exorbitantly high fees to merchants. BNPL fees range from 3% to 8% of the purchase price, typically falling on the higher end of this scale. 

This can be 3-4x more expensive than what it would cost a business to accept a credit card transaction using a traditional payment processor. 

In addition to taking up to 8% immediately from the merchant, BNPL providers charge up to 25% of the loan amount in late fees to the consumer for missed payments. 

If the consumer knows that they can make their payments on schedule, it can be a pretty good deal for them. But it’s always going to be expensive for merchants, and may not be worth the drastically higher costs—especially if your margins are already razor thin.

Pros and Cons of Buy Now Pay Later (BNPL)

The pros and cons of BNPL are very different depending on what side of the transaction you’re on. So to help illustrate the advantages and drawbacks, I’ve separated this section into two distinct categories—BNPL for merchants and BNPL later for consumers. 

For Merchants

Pros

• Ability to get paid in full for a transaction that the customer hasn’t actually paid for yet.
• Don’t have to worry about collecting installments or dealing with missed payments.
• Potential to drive more sales on high-ticket items.

Cons

• Sky-high processing fees, often up to 8% per transaction. 
• Another integration in your checkout flow can add complexity to your payment systems.
• Terms can vary significantly by provider, making it difficult to find a BNPL partner that fits your needs.

For Consumers

Pros

• Interest-free payment plan.
• Quick (and often instant) approval, unlike a credit card or loan application.
• Soft credit checks don’t impact credit scores, and there’s no minimum credit score required for approval. 

Cons

• Strict repayment terms over a short period of time.
• High late fees and interest may be charged on missed payments.
• Encourages consumer debt and overspending.
• Fewer consumer protections compared to credit card purchases.

List of Popular Buy Now, Pay Later BNPL Providers

If you’re a merchant who’s interested in offering BNPL to your customers, the first thing you need to do is find a BNPL service to partner with. This is much easier than trying to manage installments on your own.

I’ve put together a short list of some of the most popular BNPL providers on the market today.

• Affirm
• Klarna
• Afterpay
• Splitit
• PayPal
• Sezzle
• Shop Pay
• Payl8r
• Zip (formerly Quadpay)
• Laybuy

We’re not affiliated with any of these providers and we’re not endorsing them in any way. In fact, we really don’t recommend BNPL to any business. So make sure you conduct your due diligence if you’re considering any of these services.

Our Final Thoughts on BNPL

Despite the handful of benefits, we do not recommend BNPL for any business.

As a merchant consultant, it’s in our DNA to do everything we can to help lower processing fees, and BNPL does the exact opposite. Instead of getting a 2% or 3% fee from your payment processor, you can be charged upwards of 8% from a BNPL service. 

In my opinion, that’s just way too much money and not worth eating into your profit margin.

Plus, BNPL terms can’t really be negotiated. But credit card processing is 100% negotiable. So if you sign a deal with a BNPL provider that’s charging 6% or 8% per transaction, don’t expect that rate to ever drop. However, your credit credit processing rates can always be negotiated with your processor and be lowered at any point.

That said, BNPL can be a solid option for consumers. But only if you know that you can make your scheduled payments. Just be aware that you’re not getting the same type of consumer protections that you would normally get from a credit card payment, and also you won’t benefit from the same type of awards you’d get through a credit card.