How does Buy Now Pay Later work? BNPL meaning and examples

As a small business owner you’re always making important decisions, and figuring out the best way to accept payments from your customers is one of the biggest. In today’s competitive market, offering a diverse array of ways to pay can put you ahead of the competition.

Whether you’re thinking about how to start a business and take payments for the first time or you’re exploring additional small business payment options for an existing operation, you might allow your customers to pay using credit and debit cards, digital wallets, bank transfers, payment links, and invoices.

And then there’s one of the most talked-about trends when it comes to customer convenience: Buy Now Pay Later (BNPL).

What does Buy Now Pay Later mean? Essentially, BNPL lets your customers make purchases and pay over time in manageable chunks. These so-called “point-of-sale loans” have become increasingly popular in recent years, and can help increase your sales, bring in new customers, and keep them happy.

But how does BNPL work, and what’s in it for your business? In this guide, we’ll dive into the details of BNPL, its benefits, potential pitfalls, and whether it’s a good fit for your business. 

Whether you’re just hearing about BNPL or looking to understand BNPL meaning better, this guide will give you the insights you need.

How does Buy Now Pay Later work?

BNPL schemes are designed to offer customers short-term loans to be paid back in a series of fixed payments, often with no interest or additional charges. This setup ensures that payment amounts are clear upfront, with each instalment being consistent.

Before we explore BNPL services in more depth, it helps to have a better understanding of how the process works from a customer’s perspective.

Here’s a step-by-step guide:

1. Selection at checkout – When customers are ready to pay, whether they’re shopping in a physical or online store,they choose BNPL as their payment option.

2. Choosing a payment plan – Customers then pick a payment plan that suits their budget. Most plans involve splitting the total amount into equal payments over a few weeks or months.

3. Approval process – If the customer is using a BNPL product for the first time, a quick approval process takes place. This usually involves a soft credit check to ensure they can handle the payment plan.

4. Immediate purchase – Once approved, the customer completes their purchase without needing to pay the full amount upfront. They get to take the product home or receive it as usual if it’s an online purchase.

5. Scheduled payments – Payments are then automatically deducted from a customer’s bank account, debit card, or credit card according to their agreed schedule.

Buy Now Pay Later options

There are plenty of BNPL options allowing consumers to pay in instalments. Let’s break down the different types of BNPL solutions and see what they could mean for your enterprise.

Specialist BNPL providers

Traditional Buy Now Pay Later providers like Clearpay, Klarna, and Zilch provide BNPL loans online and through mobile apps. These let customers split their payments into chunks, making it easier to budget for larger purchases. They’re accepted by various retail businesses.

To advertise BNPL options online or through an app, you’ll need to sign up for a retailer account with the BNPL provider. This setup can help attract customers looking to pay over time, and also gets your business listed in the provider’s directory, potentially bringing greater visibility for your online business ideas.

One convenient feature of these BNPL apps is the use of virtual Mastercards or Visas. This means customers can use their BNPL option without you even realising it, as the transaction will process like any other card payment. However, if you want to actively promote BNPL options, signing up as a participating retailer is necessary.

Let’s take a quick look at the features of different BNPL apps.

Clearpay

Clearpay lets customers shop and pay in four instalments either online, in-store, or through the app. They pay 25% of the sale amount upfront, then three more instalments every two weeks. There’s no interest, but late fees can apply.

Customers can add a Clearpay card to Apple Pay or Google Pay for in-store purchases. Merchants need to sign up as a Clearpay retailer to accept these payments. 

Klarna

Klarna offers multiple payment options to customers: Pay Now, Pay in 3 (three interest-free payments every 30 days), and Pay in 30 (shop now, get 30 days to pay). Like Clearpay, these options are available online, in-store, or through the app.

They also provide a virtual Visa card, allowing customers to shop anywhere, even at non-participating retailers. Customers can clear their balance once a month for interest-free shopping or pay over longer periods for a fee. However, this is classed as a separate Klarna Financing product for which customers apply separately.

PayPal

PayPal has a BNPL system dubbed Pay in 3. As the name suggests, it splits purchases worth between £30 and £2,000 into three instalments, with no interest payments or late fees. The first payment is made at the moment of purchase, with the ensuing two payments taking place on the same date over the following months.

The payments are made automatically through the customer’s PayPal account, using the funding source designated by the customer. This can be either a debit card or linked bank account. Credit cards can’t be used for the Pay in 3 method.

Zilch

Zilch offers three payment options: Pay in Full (with rewards up to 5%), Pay over 6 Weeks (25% upfront, then payments at two, four, and six weeks), and Pay over 3 Months (25% upfront, then payments over three months).

Rewards can be used to discount future purchases or saved for larger buys. There’s sometimes a small fee for Pay over 6 Weeks and Pay over 3 Months.

Zilch also provides a Zilch Mastercard, which can be used online and in-store at any retailer by enabling the shop anywhere option in the app.

BNPL options through banks

Some banks and financial institutions also offer BNPL features. For example, Monzo Flex allows cardholders to convert purchases into instalment plans without the need for a separate BNPL service. It combines the convenience of a credit card with the structured repayment plans of BNPL. However, customers pay interest on purchases repaid over longer periods.

For small business owners, offering these Buy Now Pay Later options requires no additional setup beyond accepting card payments. Whether you’re using an in-store card machine or an online payment gateway to handle card payments, this simplifies the process while ensuring your customers can enjoy a range of payment options. 

BNPL agreements

Retail-specific BNPL agreements, like Instalments by Barclays at Amazon, provide tailored payment solutions for specific platforms. 

These agreements enable customers to make larger purchases on a particular retailer’s website and pay in instalments. This method is beneficial for regular customers of those retailers, offering a straightforward way to manage the cost of larger purchases.

For businesses, this means the BNPL option is limited to a specific e-commerce site, but it can be useful for those with a strong presence on these platforms. There’s no need for extra involvement from retailers as the provider handles the payment processing. As with all BNPL options, you’ll need a business account to accept funds.

Pros and cons of BNPL for small businesses

If you’re considering accepting BNPL payment options for your business, it’s important to understand both the potential perks and possible drawbacks. Here’s a closer look at how Buy Now Pay Later can impact your business.

Advantages of BNPL

The benefits of BNPL for your business include:

Increase in average order value

Accepting Buy Now Pay Later can boost your average order value as customers are more inclined to buy higher-priced or additional items when they can spread the cost over several payments. 

This can be a great way for your business to make extra money, and with more funds to play with in your small business budget,you’ll be better equipped to grow and take advantage of any profitable business opportunities that come your way.

Customer acquisition and loyalty

BNPL options can attract customers who prefer flexibility and help retain existing customers who appreciate the convenience. This can play into an overall marketing strategy for small business success, improving both customer acquisition and loyalty.

Competitive advantage

Providing BNPL options can give you a competitive edge. Some customers favour retailers who offer Buy Now Pay Later, setting you apart from competitors who don’t. Learning how to do a competitor analysis can help you decide if offering BNPL will offer an advantage in your particular sector.

Upfront payments

One big advantage of BNPL is getting upfront payments. With BNPL, even though your customers pay in instalments, you receive the full payment from the provider right away. This keeps your cash flow steady.

By contrast, offering credit terms directly to customers means you might wait for payments, which can strain your finances. Plus, managing and collecting those payments can be time-consuming and risky if customers pay late or not at all.

BNPL takes that burden away, letting you focus on growing your business while still offering customers flexibility.

Disadvantages of BNPL

There are some pitfalls to keep in mind when considering Buy Now Pay Later as a business owner. These include:

Merchant fees

BNPL providers charge transaction fees to merchants, and these fees can be higher than for regular transactions such as debit card payments. This can have a noticeable impact on your bottom line, especially if your business operates on slim profit margins.

Let’s say you set up as a sole trader running a handmade crafts or cake business where the costs of materials and labour already leave limited room for profit. The extra processing fees associated with BNPL could really cut into those narrow margins, making it less feasible to offer BNPL as a payment option.

While BNPL can bring in more customers and potentially increase sales, it’s important to consider whether those benefits will outweigh the additional costs or if they might actually shrink your overall profits.

Integration and setup costs

Setting up BNPL options might involve initial costs and technical integration, which can be a bit daunting for small businesses with limited resources. You’ll need to connect your existing payment systems to the BNPL provider, which might require some technical know-how or even outside help.

These extra small business expensescan add up, especially if your business is already operating on a tight budget. Using accounting tools for small businesses can help you track and allocate your budget and manage these costs effectively.

Risk of increased customer debt

Although your business gets paid upfront, customers might overextend themselves financially with BNPL, leading to defaults. This can result in late fees from providers, which might unfairly affect customer satisfaction in your business.

As part of your small business risk management strategy, it’s important to be aware of these potential problems and consider how they may impact your customer relationships and your brand reputation.

Specialised providers

BNPL providers are specialised providers and typically don’t offer the full range of products needed for small businesses. This means you’re likely to still need separate solutions for things like point of sale systemsand invoices.

Additionally, unique payment options like QR codes and Tap to Pay on iPhone or Tap to Pay on Android are unlikely to be covered by your BNPL provider. Managing multiple providers could increase complexity for your business.

Higher returns rates

Offering BNPL options can lead to higher return rates, which can prove costly for your business. This is because it often encourages impulse purchases, which customers may later regret. Additionally, some customers might overestimate their ability to pay off instalments, leading to money worries and returns.

Is Buy Now Pay Later right for your business?

BNPL has benefits for both customers and businesses, but it’s not always the best fit. Here are some questions to consider before you sign up.

How well do you know your customers?

Understanding your customer base is vital. Will they appreciate and use flexible payment options?

If your customers are looking for ways to manage their expenses better, BNPL could be attractive to them. Learning how to identify your target market will give you insights into whether it’s worth offering BNPL options.

For instance, a trendy online clothing store targeting young adults might benefit greatly from offering BNPL. Younger customers often appreciate the ability to spread payments over time, making it easier to afford more items upfront.

On the other hand, a high street store selling home goods to older customers might not see the benefits. These customers, who are typically more financially stable, might prefer to pay in full at the time of purchase and may not find BNPL options as appealing.

What impact will BNPL have on your finances?

While BNPL providers pay you upfront, they also charge transaction fees. Compare these fees to your current payment processing costs. Will the potential increase in sales and average order value outweigh any additional fees?

Performing a cost-benefit analysis can help you to determine the impact on your small business finances and important financial metrics like your break-even point.

What are your long-term business goals?

When you’re thinking about BNPL options, it’s important to see how they fit into your bigger picture. 

Are you aiming to grow your customer base, boost sales, or improve customer retention? If BNPL aligns with where you want your business to go, it could be a great addition to your business growth strategies.

For instance, if you’re focused on how to scale a business or thinking about how to build customer loyalty,and are financially comfortable enough to absorb higher transaction fees, you may judge this to be a good moment to utilise BNPL in order to hit those goals.

What are your product prices?

If you’re working on side hustle ideas or small business ideas from home selling low-cost items, BNPL might not be necessary. For example, a part-time business offering inexpensive items like journals or greetings cards at local markets may not see much benefit from BNPL.

However, if you sell high-ticket items, whether online or in your own retail store, BNPL can make these purchases more accessible to customers, potentially boosting your sales.

Are alternative approaches more suited to your business?

If BNPL doesn’t seem like the right fit, there are other ways to help customers afford bigger purchases. For example, you could offer layaway services, allowing customers to pay for items over time before taking them home.

Depending on what your business sells, another idea is to sell discounted gift cards in the run-up to big events like Christmas and the summer holidays. This gives customers a way to budget for future purchases and still enjoy great deals.