What Is Buy Now, Pay Later? How BNPL Works (2023)

For the better part of the past century, when a customer wanted to buy an item on credit from their favorite stores, they had two main options. The first was putting the purchase on a credit card. The second was using a layaway program, which allowed them to reserve an item at the store, pay for it in installments, and receive the merchandise once it was paid for.

Today, credit cards have a solid foothold—79% of the US population has at least one in their wallet—but layaway plans are becoming a thing of that past. They’re being replaced by a new payment option: buy now, pay later (BNPL) programs managed by third-party credit specialists. And while retailers don’t get to charge interest to customers using BNPL (in fact, they are charged a fee by the BNPL vendors), they are making up for it in increased sales volume. BNPL has also helped equalize the credit market. It enjoys surging popularity with those who, for various reasons, do not typically purchase items with a credit card.

What is buy now, pay later (BNPL)?

A buy now, pay later plan (BNPL) is a loan offered to a customer at the point of sale so they can purchase merchandise on credit but without a credit card. Popular options include Shop Pay Installments from Shopify, Affirm, Afterpay, Sezzle, PayPal, and Klarna. Many will run an instant soft credit check on the customer (the type that doesn’t affect your credit score), and then release funds for a point-of-sale loan. Customers have different options for paying off the loan balance, which typically depend on the company used and the amount borrowed; some payment options incur interest, but others do not, and some companies charge late fees or fees for missed payments. BNPL companies may offset the lack of interest charged to the consumer with a fee that they charge the retailer.

How BNPL works

Here is how the BNPL process works for both consumers and retailers.

  • A customer shops as normal and begins the checkout process. If you’re a customer, you start the BNPL process as you would any other ecommerce transaction. You shop your favorite online stores, select merchandise, and prepare to pay.
  • The retailer’s chosen BNPL vendor presents the option to buy now and pay later. During checkout, the customer will have the option to purchase using BNPL, along with other purchase options like credit or debit cards.
  • The lender runs a soft credit check on the customer. When the customer opts to purchase their items using BNPL, they enter some personal details with the BNPL lender (such as a full address and Social Security number). The lender immediately runs a soft credit check on the customer to get assurance that they will eventually pay back their loan based on their credit history. This type of credit check does not get reported to the credit bureaus, so it will not dent credit scores like a full credit check might.
  • The BNPL vendor charges a fee to the retailer. The BNPL vendor will take a percentage of the retail transaction, and this is billed directly to the retailer. The fee (which typically ranges between 2% and 8%) gets deducted from the sum the BNPL lender remits to the merchant. This is similar to the arrangements that traditional credit card companies have with retailers.
  • The customer pays off the balance over time. Most BNPL vendors offer interest-free payments if a customer pays their full balance in a short period of time (typically 30 days). If customers need more time to pay down their balance, the lenders offer different payment plans with different interest rates. Much like with a credit card, the faster the customer pays off the bill, the less total interest they pay.

4 advantages of BNPL for customers

As a consumer, you enjoy several potential benefits when using a BNPL service.

  • It’s an equalizer for those without credit cards. A significant minority of customers (about 20%) do not have a credit card, and the majority (55%) of those with a credit card have maxed out at least one card. A BNPL service offers many of the same benefits as a credit card but for smaller, individual purchases. You can even use a BNPL service like a credit card by requesting a virtual card number in advance of your purchase. This card number will cover the exact amount of money needed to complete your purchase. You do all this on the BNPL vendor’s website or via its smartphone app.
  • Flexible payment options. Most BNPL services offer options to customers at the point of sale. As a customer, you can pay the full purchase price using the BNPL service, or you can split your purchase between BNPL and some other payment source (like a debit card).
  • Options for interest-free payments. If you choose a short loan period and make your payments on time, you can borrow money without paying any interest.
  • Soft credit checks have no impact on your credit. MostBNPL vendors run soft credit checks on their clients to affirm their eligibility for a loan. Unlike a hard credit check, this will not dent your credit score. On the other hand, if you are late in your payments to your BNPL vendor, this does get reported to credit bureaus, much like when you’re late on credit card payments.

6 popular BNPL services

Retailers regard buy now, pay later services favorably because they’ve been shown to boost overall sales volume. As a result of this retailer preference, there are more viable BNPL services than ever before. Here are six well-regarded options.

1. Shop Pay Installments

Shopify offers a robust BNPL service called Shop Pay Installments. It does so in partnership with Affirm, using the same network of lending partners. When merchants choose Shopify as their ecommerce vendor, they can use Shop Pay Installments to let their customers pay their balance in four interest-free installments, while the merchant still receives the full balance at the time of purchase. Shop Pay Installments grants online small businesses the same BNPL benefits enjoyed by major retailers, including a larger average order value and less cart abandonment.

2. Affirm

Affirm is among the biggest BNPL vendors, and it is prominently offered as a payment option at big retailers like Amazon and Target. For short-term loans (four payments with two weeks between each payment), Affirm charges no interest and no fees. Longer-term loans require interest payments (ranging from 10% to 30% APR, depending upon your credit) but still no fees. If you are shopping at retailers that don’t already partner with Affirm, there’s still a good chance you can use the service via a virtual card.

3. Afterpay

Founded in Australia, Afterpay is now owned by US-based Block (formerly Square). It is even larger than Affirm, as it partners with over 100,000 retailers. One of Afterpay’s prominent features is a smart credit limit tool that creates a spending limit for shoppers based on their personal credit history. This ideally prevents them from spending more than they can pay back. It also offers consistent reminders to make payments, and its virtual card service is easy to use. Unlike Affirm, Afterpay does charge late fees, but these will never apply if you make your payments on time. Its interest rates fall into the same 10% to 30% range as Affirm.

4. Sezzle

Sezzle is a BNPL company with a signature feature that lets customers push back payment due dates by up to two weeks. Sezzle does require a 25% down payment on all purchases, but you can pay off most loans without owing interest. Sezzle actively cultivates younger users; it describes itself as “on a mission to financially empower the next generation.” It has over 44,000 retail partners, but it’s less popular among the largest retailers (one notable exception is Target, which does offer Sezzle as a payment option).

5. PayPal

PayPal is probably better known as a secure online payment system or as a person-to-person cash transfer app, but PayPal is also a BNPL lender. Its signature lending product is an interest-free service called Pay in 4, which breaks transactions into four scheduled payments. PayPal limits this service to purchases between $30 and $1,500. By contrast, Affirm will loan up to $17,500. The advantage to using PayPal is that it boasts nearly 30 million active merchant accounts, which means it can be easily used without taking extra steps like applying for a virtual card number. PayPal’s standard interest rate is roughly 24% APR.

6. Klarna

Klarna was founded in Sweden in 2005. It now reports over 85 million customers, and it partners with hundreds of thousands of merchants worldwide. Depending upon the type of borrowing you do, Klarna may run a soft credit check or a hard credit check. Rather than set strict borrowing limits, Klarna uses a proprietary metric it calls Purchase Power. Its official website describes Purchase Power as “an estimated amount based on factors such as your payment history with Klarna and your outstanding balance.” If you have good credit and a solid payment history, you may be eligible for larger point-of-sale loans from Klarna than from most other BNPL vendors. When you do pay interest, it will max out at 25%.

Final thoughts

As a retailer considering a BNPL option, you will have to balance two considerations. One is the fees that BNPL vendors charge on each purchase. The other is the increased shopping carts of customers who use a BNPL service.

Most BNPL retailers do not publicly disclose their merchant fees, but they typically range between 2% and 8% of a customer’s purchase amount. This puts them in the realm of major credit card companies. As such, it may be no more expensive for a merchant to accept a BNPL service than to accept credit cards. And much like with credit cards, a BNPL service can inspire customers to spend more. Retailers from Macy’s to Peloton to Rue21 have reported notably increased sales among customers using a BNPL service. For these vendors and many others, the added sales volume more than compensates for the fees they’re paying.

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What is BNPL and how does it work? ›

Buy now, pay later, or BNPL, is a type of installment loan. It divides your purchase into multiple equal payments, with the first due at checkout. The remaining payments are billed to your debit or credit card until your purchase is paid in full.

How does BNPL work in India? ›

Yes, BNPL is a type of installment loan as you pay the amount spent by you via Equated Monthly Installments (EMIs). After a certain period, interest is charged on the amount spent by you, and in case you fail to pay within the stipulated period, penalty is levied.

What does BNPL mean on very? ›

Buy Now Pay Later for 12 months when you spend £300 or more (12 calendar months) The payment free period will start from the date of order (including for those items which are purchased on pre-order and/or are not ready for immediate dispatch).

How does BNPL make money? ›

BNPL in particular makes money with transaction fees. So, if I were to use BNPL to buy that Baggu hat off of Urban Outfitters, Urban Outfitters would have to pay about three to six percent of that purchase price to the BNPL firm.

Where is BNPL used? ›

Clothing is the most popular category for BNPL purchases (PYMNTS) Almost two-thirds (63.5%) of respondents who use BNPL purchased clothing.

How is BNPL implemented? ›

Best Practices for Implementing a Buy Now Pay Later (BNPL)...
  1. Implement the Right Solution: Split Payments or Installment Loans. ...
  2. Inform Consumers Early in the Purchase Journey. ...
  3. Incorporate BNPL Into Seasonal Promotional Strategies. ...
  4. Offer an Omnichannel Experience. ...
  5. Evaluate Approval Rates.

What is the best BNPL service? ›

Best Buy Now, Pay Later Apps of 2022
  • Best Overall: Affirm.
  • Best for Flexible Payment Plans: Sezzle.
  • Best for Students: Afterpay.
  • Best for No Credit Check: Splitit.
  • Best for Bad Credit: Perpay.
  • Best for Small Purchases: PayPal Pay in 4.
  • Best for Large Purchases: Klarna.

Who is the biggest BNPL company? ›

Who are the biggest BNPL companies? With millions of users, Klarna and Afterpay are the two biggest BNPL companies, according to a 2022 report from yStats.com. Both companies work with tens of thousands of retailers and are responsible for millions of transactions.

What are the pros and cons of BNPL? ›

Interest rates are high and can be higher than credit card interest rates.
Pros and Cons
  • Convenient and easy to use.
  • No fees if you make your payments on time.
  • Link your payments to your debit card, bank account, and in some instances a credit card.
  • May also be available at certain retailers offline.

How does BNPL work with credit cards? ›

With 'buy now, pay later' services, also known as point-of-sale loans, consumers are able to split their purchases into installment payments due every two weeks over the course of six weeks.

Who are BNPL users? ›

Those in the 35–54 age group and working full time were most likely to use BNPL services. The typical Indian BNPL user, according to the report, would be someone in the 30-39 age group, residing in a Tier-1 city, working full-time, and usually from a high income group.

What are the risks of BNPL? ›

One of the primary financial risks of BNPL is that it may encourage you to spend significantly more than you normally would. Almost 70% of consumers that have used BNPL services admit to overspending when using them. “With these loans, overspending is kind of the point,” Schulz said.

Are BNPL interest-free? ›

Buy Now, Pay Later (BNPL) is a type of short-term financing that allows consumers to make purchases and pay for them at a future date, often interest-free.

Why do customers prefer BNPL? ›

BNPL is a popular financing option that allows customers to buy a product without needing to pay immediately. It is more like a short-term credit given to customers by a third-party service provider, which gives customers the freedom to choose a future date to repay the loan or the cost of products purchased.

Is BNPL a product or service? ›

BNPL is an online payment service that enables customers to purchase goods using (mostly) interest-free credit and pay for the items at a later date.

How is BNPL better than credit card? ›

Costs. Ownership costs of credit cards are generally higher as there is a joining fee, annual fee, rewards redemption fee etc. whereas BNPL cards do not have a joining or annual fee.

Does BNPL have a future? ›

The sector is here to stay, at least for the foreseeable future. But investor sentiment for BNPL has clearly turned and the path forward will be bumpy. Stand-alone capital raises to support working capital and to pursue the 'Afterpay version 2.0' dream will be near impossible to achieve in current market conditions.

What happens when you miss your BNPL payment? ›

If the total amount due is not paid on or before the payment due date, then the customer is liable to pay the amount along with late payment charges and default interest. Most BNPL schemes offer a smaller repayment tenure of 15 to 45 days.

Is BNPL a payment service? ›

A buy now, pay later plan (BNPL) is a loan offered to a customer at the point of sale so they can purchase merchandise on credit but without a credit card. Popular options include Shop Pay Installments from Shopify, Affirm, Afterpay, Sezzle, PayPal, and Klarna.

How does BNPL work for banks? ›

BNPL will likely increase the spending and lending volumes for retail banking, and for business banking it usually triggers additional services around cash management. Boost loyalty and personalization: Banks can proactively create offers and manage real-time personalization of both in-store and e-commerce purchases.

Which BNPL is the best? ›

Best for most shoppers

Affirm stands out among BNPL competitors for a few reasons. First, it offers a variety of payment options, allowing flexibility to pay loans back. Like other BNPL apps, it offers a Pay in 4 option, called Split Pay, which divides costs into four interest-free payments, paid every two weeks.

Who provides buy now, pay later? ›

LazyPay is more popular among shoppers because it allows users to pay using UPI at merchant locations. Using the mobile app, you can shop both online and offline. Pay in 15 days or select EMIs of 3, 6, 9, or 12 months. Zomato, Tata Sky, MakeMyTrip, Dunzo, GoIBIBO, BB Instant, and other popular merchants accept LazyPay.

Is BNPL good for consumers? ›

BNPL has a positive force on the financial future of its users. 43% of those have used BNPL reported that they felt their finances would be better off in one year while only 26% of those who had not used BNPL reported the same.

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