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Buy Now, Pay Later

Five thousand years ago, the Mesopotamians invented the shekels, which is now known as arguably the first form of money. We've come a long way since then, especially now with the invention of bitcoins.

A big part of the money and payment ecosystem is offering credit, and the history of credit cards is a fascinating read. Those who grew up in the nineties would probably remember the credit card imprinter. A vendor would put a credit card on top of the machine, place several layers of carbon paper, and slide the bar back and forth, making a clunky yet authoritative sound. The raised surface of the credit card (that has the customer's name and credit card information) would then be imprinted on the carbon papers.

Fast forward to the recent times and now almost every street-food vendor in Los Angeles has a credit-card reader connected to their smartphone.

Now, on top of credit cards, payment merchants have even made it easier to purchase with the option to buy now, pay later (BNPL). Using a credit card itself is a "buy now, pay later" option, but BNPL vendors like Klarna and Afterpay take it even further by giving customers the option to pay even later without a credit card.

How BNPL Works for Customers

A regular transaction involves two parties: the customer and the vendor. A BNPL transaction adds another player into the mix. When the customer decides to use the BNPL option, The BNPL merchant pays the vendor in full while the customer will pay the BNPL merchant in installments.

When the customer joins a BNPL merchant, they'll have the option to link their bank account to their BNPL account.

A customer who uses the BNPL checkout will go through a soft credit-check screening that in a few seconds will tell them if they're eligible for the option. This screening doesn't affect the customer's credit score and takes into account their payment history and credit card rating. BNPL vendors will do a soft check for every purchase, meaning a customer who has been approved for a previous purchase may or may not be approved for the next one.

Unlike credit card payments, the installments are scheduled and have a specific amount. Some BNPL vendors impose penalty fees for late payments.

How BNPL Works for Businesses

BNPL merchants promise convenience for both customers and sellers because they want people to use their service. But here are some things a business owner needs to consider before installing a BNPL option:

Your Type Business and the Monetary Value of Your Merchandise

Part of BNPL's appeal is that the installment plan helps dampen the "sticker shock" a customer may experience upon looking at the price sticker/tag. Businesses that sell big-ticket or luxury items like electronics such as TV and washing machines can benefit from adding a BNPL option to their checkout process.

However, we're also seeing fast-fashion websites offering BNPL checkout to capitalize on customers who spend impulsively. So, if you want to encourage a more thoughtful purchase, BNPL may not be the best idea.

The demographics of your market play an important role in deciding whether or not you should implement the BNPL option. Research by the Royal Bank of Canada Capital Markets shows that younger shoppers embrace BNPL as an alternative to credit cards. Here's a more complete breakdown of the demographic that favors the BNPL method.

Another report from the Mercator Advisory Group found that in 2019, the size of the BNPL lending market was around USD 3 billion. In 2020, it shot up to USD 39 billion (a 1200% increase). They project it would surpass USD 100 billion by 2024.

The BNPL market has become very lucrative that not only banks and credit card companies have developed their own BNPL system, but also companies like Apple have joined in.

Fees and Commission

Most BNPL merchants don't disclose their commission and other fees upfront, so vendors who are interested in using the BNPL payment option will need to contact these merchants to find out how much they take out of each transaction (including returns and refunds).

In general, the fees vary from 2% to 8%. Some BNPL merchants add a fixed cost on top of every transaction.

Keep in mind these fees will run parallel with how large their network of vendors is and how many customers they have. Joining a BNPL network means your business may get more exposure, especially if the BNPL merchant offers ad and brand placement opportunities on their app or website.

Ease of Integration

Even a good e-commerce site can't have everything. That's why they partner up with developers to create supporting apps and widgets to make things easier.

Some BNPL merchants' services include brick-and-mortar stores, but integration for both physical stores and e-commerce sites, integration remains a big headache.

Make sure you know what e-commerce platform you use and if they integrate well with the BNPL merchant you consider partnering with. Ask if there's an additional set-up fee for the integration and if there's 24/7 technical assistance if something ever goes wrong.

Impact on Customer

This is such a gray area. On one hand, businesses shouldn't really be responsible for a customer's financial decision. On the other hand, businesses have to strive to provide the best customer service experience.

There are numerous BNPL nightmare anecdotes when it comes to customers not being able to pay on time and getting hit by penalties, or customers who keep getting charged even when they've decided to return the item. You may say, "Oh, but how is this my fault as a business owner?" And you're absolutely right: it's not your business's fault. But this may make your business look guilty by association or worse: you may be caught in the middle of the dispute.

The final thing to remember is that BNPL payment system is relatively new to the world of commerce. New policies will be forged, new technologies will be invented, hopefully, to offer better protection to both the customer and the vendor. If a BNPL service is something you consider installing for your store (whether physical or online), don't forget to find out what the merchant's exit clause is, just in case you decide to no longer use the service.


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