For a major part of the previous century, when a customer would like to purchase an item on credit from any store, they primarily had two alternatives. The first was placing the purchase on the credit card. The second was making use of a layaway program -allowing them to reserve a particular item at the store. Eventually, they would pay for the item in installments and receive the product once the entire payment was done.
In the modern era, credit cards have a major foothold in the market -around 79 percent of the population in the United States alone possesses a credit card in the wallet. However, the concept of layaway programs has become a thing of the past. They are now getting replaced by an all-new payment option -BNPL or Buy Now, Pay Later payment plans that are usually managed by third-party experts.
In case of BNPL plans, retailers are not expected to charge interest out of the customers. As a matter of fact, they are usually charged a fee by the respective BNPL vendors. Still, retailers are making up for the concept of BNPL in huge volumes. BNPL has also been helpful in equalizing the entire credit market. It continues rising in the overall popularity -especially with individuals who do not usually purchase items with credit cards.
What is Buy Now, Pay Later (BNPL)?
BNPL or Buy Now, Pay Later serves to be a type of loan that is offered to the customers at the dedicated POS or Point of Sale. The concept allows customers to buy the products on credit. However, there is no requirement of a credit card.
Most BNPL providers will offer access to instant soft credit check on the respective customer (the type not affecting the credit score). Eventually, they will release funds for the POS or Point-of-sale loan. Customers are usually provided with different options for ensuring the payment of the loan balance amount -usually depending on the company and the amount that is borrowed. Some payment options will incur interest. In some cases, other payment options might not incur any interest. However, there are some companies that might go ahead with charging fees on missed payments or late fees. BNPL goes ahead with offsetting the absence of interest charged out of customers with the fee that is charged out of the retailers.
How Does BNPL (Buy Now, Pay Later) Work?
Some of the ways in which BNPL process will work for both retailers and consumers are:
- A customer shopping as normal and starting the checkout process: As a customer, you will initiate the BNPL process -just like any other e-commerce process. You will stop by your favorite online store, select the desired merchandise, and start preparing to make the payment.
- The selected BNPL vendor of the retailer will offer the option of BNPL: At the time of checkout, the customer has the option of purchasing with the help of BNPL. It is in addition with other purchasing options like debit cards and credit cards.
- The lender will run the soft credit card verification on the consumer: As the customer will choose the option of buying the items with the help of BNPL, they are expected to enter some basic details with the respective BNPL provider (like Social Security Number and full address). The lender will instantly execute a soft credit card verification on the customer to be assured that they will ultimately pay back the loan amount depending on the credit history.
The given type of credit check will not be reported to the respective credit bureaus. Therefore, it will not hamper the overall credit scores like in the case of a full-end credit check.
- The BNPL vendor charging a fee out of the retailer: The BNPL vendor will eventually take some percentage of the ongoing retail transaction. It is billed directly out of the retailer. The fee (usually ranging between 2 and 8 percent) is deducted out of the amount BNPL lender will be remitting to the merchant. It is quite similar to the financial arrangements most conventional credit card companies feature with retailers.
- The customer paying off the balance over time: Several BNPL vendors go ahead with offering interest-free payments in case a customer will pay the full balance in a shorter span of time -usually 30 days. In case customers will require more time to pay down the balance, the lenders will provide multiple payment plans with varying interest rates. Quite similar to a credit card, the faster the customer will be paying off the bill, the less total amount of interest is expected to be paid.
Top Benefits of BNPL for Customers
When you are the consumer, you will receive several benefits by using a BNPL service. Some are:
- Equalizer for Those Not Having Credit Cards: A majority of consumers do not have access to a credit card. Also, a majority of consumers having access to a credit card will have eventually maxed out at least card. In this case, a BNPL service will offer similar benefits to that of the credit card but for individual or small-sized purchases.
You can also think of using BNPL services in the form of a credit card as you request a virtual card number before making a purchase. The virtual card number will be covering the exact amount required for completing the purchase. You can do it on the website of the BNPL provider or the smartphone application.
- Flexible Payment Options: A number of BNPL service providers deliver the option to the end customers at the point of sale. When you are the customer, you have the opportunity to make full payment amount with the help of the BNPL service. On the other hand, you can also think of splitting up the purchase between the BNPL vendor and some other source of payment -like the debit card.
- Options for Interest-free Payments: If you go ahead with the option of a short loan period while making all your payments on time, you are able to borrow money without the payment of any interest.
- Soft Credit Checks having No Influence on the Credit: Several BNPL vendors out there go ahead with executing soft credit checks on the respective clients to make sure that they are eligible for the loan. In comparison to the hard credit check, soft credit checks will not hamper your credit score.
At the same time, in case you are late in the payments to the BNPL vendor, it is not reported to the credit bureaus -like in the case of credit card payments.
Types of BNPL Payment Options Available for Merchants
Merchants who wish to leverage BNPL solutions from some third-party service provider should understand that there are two types of BNPL plans that they might come across -shopper interest loans and merchant transaction fee loan.
In case of merchant transaction fee loan, a dedicated loan is offered to the consumers during the point of sale. On this loan, there is no interest charged until customers are making timely payments. Rather than this, the merchants are charged a specific transaction fee. In most cases, BNPL providers will not directly disclose their pricing. Therefore, merchants who might be interested in continuing a relationship with a reliable BNPL service provider should go ahead with registering the account and submitting relevant business information to receive the quote.
While the fees that merchants are expected to pay to leverage BNPL services are quite higher, still these services help in drawing the attention of the target customers while encouraging purchases that might not be successful otherwise.
BNPL services can be significantly valuable for merchants selling products or services available with a high-end price. It serves to be the option of paying nothing upfront while allowing merchants to hold onto consumers who might have been driven away otherwise.
When a shopper will interest loans, there are no fees charged out of the merchants. However, customers are expected to interest as a part of the respective instalment plan. Due to this, BNPL serves to be a highly attractive option for merchants. Delivering options of BNPL payments can be specifically valuable during the festive or holiday season -when customers are known to improve the spending power by buying gifts for relative, family, and friends.
As a retailer, if you are considering the use of BNPL services, you should look into some basic considerations. Firstly, you should look into the fees BNPL vendors tend to charge on different purchases. Secondly, you should observe the increase in shopping carts of customers using the BNPL services.