Consumers are enjoying increased digital flexibility and expect businesses to follow suit on everything from delivery and curbside service to how goods are paid for. The layaway model of paying for goods over time has recently received a makeover via the e-commerce era through a type of financing called Buy Now, Pay Later (BNPL). Research shows that BNPL is expected to increase by almost 15% in 2024, reaching a market value of $109 billion in the United States.
Your business might be considering BNPL to increase revenue and reach new customers, especially millennials and Gen Z-ers, so here are some things to consider before taking the leap.
What are BNPL loans and how do they work?
Also known as “point-of-sale installment loans,” these short-term loans allow customers to buy goods or certain services without paying the full price at the time of purchase. Instead, customers make one payment upfront, typically 25% of the total cost, followed by a short series of installment payments.
These loans are mainly utilized in e-commerce, but some physical retailers are starting to offer this financing option in-store. BNPL loans are agreements between the lender (who underwrites the loan) and the customer, meaning that purchases made with BNPL are paid in full by the lender to the business at the time of sale. The customer then repays the lender for the remaining balance over a set period. Since the lender assumes responsibility for collections, if the customer misses payments, the business is not involved in the repayment process and is free from chasing down late or missing payments.
What is the difference between using a credit card and BNPL?
BNPL might sound similar to credit cards, but there are a few crucial differences for the consumer. The main difference is that payments through BNPL typically do not accrue interest and are broken out over a set timeline. Though someone could use a credit card to pay a large balance over a more extended period, doing so typically accrues interest.
Who finances BNPL loans?
When most people think of BNPL, popular third-party lenders like Affirm, Klarna or Afterpay come to mind. Most commonly thought of in the context of e-commerce and retail, BNPL is branching into other industries like health care, travel and household repair.
Not all businesses can implement BNPL financing yet, even if they want to, because there may not be a lending partner working within that industry. And just like lenders run a soft or hard credit check on customers to qualify them for the loan, businesses also need to meet certain requirements from lenders to offer this product.
How does a business benefit from BNPL?
While not all of your goods or services need BNPL payment options, it’s popular for big-ticket items because customers do not have to wait to save up for that item. Adding BNPL as an option could increase sales while also reducing the number of customers that load up their online shopping carts before eventually abandoning them.
Is setting up BNPL difficult for businesses?
Businesses that accept payment methods like debit and credit cards will likely find integrating BNPL relatively straightforward. However, the integration process can differ depending on which BNPL provider the business partners with and whether the provider already exists in their payment system. How the business checkout page is set up and who owns it can also factor into the integration process. After the initial setup, offering BNPL is as easy for businesses as offering other methods of payment.
How much does BNPL cost businesses?
BNPL lenders charge fees to businesses and usually get a cut of the sales they help to finance. The total fees can vary, and may exceed the fees of other payment methods like credit cards. When deciding if implementing BNPL is right for your business, consider whether the potential influx of customers and increased customer satisfaction will balance out the bump in fees and upfront costs.
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How does offering BNPL impact my customers?
Customers generally appreciate the flexibility of BNPL at checkout and have even come to expect it, but businesses should also remember that any issues with the lending partner may be attributed to your business. Before you enter into a business partnership with a BNPL lender, make sure to do your homework on potential providers and the unique packages and rates they offer. You’ll need to make sure they’re a fit for your industry, business goals and budget.
Managing Your Business Through a Changing Economy
Additionally, the Consumer Financial Protection Bureau issued a new rule in 2024 stipulating that BNPL vendors need to provide consumers with key protections, such as the ability to dispute charges and demand a refund. As we continue to see this practice grow, it’s vital for businesses who work with BNPL lenders to choose a partner that is compliant with the latest rules and regulations in order to avoid headaches.
As the world continues to change and evolve, you need the right partners to help your business meet its goals. Schedule a conversation with our Rockland Trust Business Banking Team or drop into your local branch to discuss how your business can succeed in today’s business environment.
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