Ecommerce industry has revolutionized how transactions take place on the internet. Before people had the option to pay through credit cards but now a new term is taking over the internet and it is Buy Now, Pay Later (BNPL). What it basically does is, it allows consumers to purchase items and pay for them in equal installments similar to the way credit cards work. But here credit cards are not required at all. And due to this fact, they are gaining more and more popularity in the eCommerce world. Why? Let’s uncover the truth is Buy now, Pay Later any good for eCommerce?
First, let’s understand how it works. Similar to credit cards, some BNPL providers approve the customers’ request for joining it. Once approved, customers can use BNPL to pay at checkout on online stores as well as in-stores. The payment here defers than the actual because the BNPL provider would pay full to the merchant but charge a small services fee to the customer. The customer would then pay to those BNPL providers in agreed-upon installments.
BNPL providers would also call this service as “Pay-over-time”, “Point-of-sale-loans”, and “point-of-sale-financing.” They describe their services slightly differently than the others however the basic rules of the service are more or less the same. Ecommerce store owners would display the BNPL payment option alongside the other payment options like PayPal or credit card. Here’s an example of affirm – a leading BNPL service provider.
When a user opts for the BNPL option, the provider performs a real-time check if the user is approved or not. If approved, then the BNPL provider allows customers to go ahead with the purchase by showing terms for service along with a repayment schedule.
The BNPL providers offer three types of services namely fixed, flexible, and micro-loans. In fixed, the repayment scheduled is set in advance so that the user knows the amount to be paid and the number of installments before making a purchase. In flexible, BNPL providers allow users to choose the number of installments ranging from 3 to 36 months depending on the user’s purchase and merchant’s agreement. And based on the number of installments selected, the amount of installment is decided. BNPL providers take user’s creditworthiness into account for the same.
The third type of BNPL service is micro-loans where BNPL providers grant a small amount of loan to users before they head to the checkout. Here, the user agrees to pay a flat fee and repayment schedule set by the BNPL provider.
Benefits of Buy Now, Pay Later (BNPL)
- The primary benefit of BNPL for users is that they get instant credit for their purchase at the checkout or point of sale.
- No credit or physical card of any sort is required which makes the checkout more hassle-free.
- BNPL helps customers & online shoppers to make quick payments making the shopping experience more streamlined.
- With BNPL, there’s no need to swipe a card, entering a 16 digit number, or transfer from a bank to eWallets or anything else.
As per one report, around 63% of the millennials aged 26 to 40 don’t own a credit card but they have more than $200 billion spending power. BNPL is a tasty solution that requires no card making them feel free from the risk of endless interest. And due to that, it is gaining more popularity among consumers of this age group. Because it enables millennial consumers to buy small or big-ticket products without worrying about having money upfront.
How BNPL can help your eCommerce store?
Well, Buy Now, Pay Later (BNPL) can help make a whole lot of money because it aids in the frictionless shopping experience of customers. Cart abandonment is another problem that eCommerce store owners face. As per the Baymard study, the cart abandonment rate stood at around 70%. But BNPL service providers like Klarna found that the BNPL option has helped reduce cart abandonment by almost 30%. This has helped almost double the profits of many eCommerce store owners.
BNPL option break the mental pressure of customers to not pay the full amount at once which makes them buy products even more and helps increase the average order value. Also, having such options, customers are more likely to return to shop even more. Affirm and Klarna reported an increase of 20% in return shoppers and Zip, another BNPL provider, reported an 80% increase in repurchase rate. But there are downsides to the Buy Now and Pay Later service as well.
The BNPL service providers generally do not offer their services for purchase plans under $50. Thus, if your average order value stands at $20, then this is not for you. Also, BNPL service providers add a small percentage of fees of the transaction to the overall product cost. So, this service is not viable for eCommerce stores running on slim profit margins.
Many BNPL services providers do not charge for missed or late payment which is unlike credit cards. However, they might charge interest for the late or missed installments. Few BNPL service providers have a flat fee for late payments.
BNPL and credit cards have the same function, to allow users to purchase big-ticket items and pay in small installments over time. The BNPL service providers have direct competition with credit card issuers. However, the BNPL has a transparent repayment structure and fees whereas credit cards have more hidden fees and charge heftily for missed or late payment.
Moreover, BNPL is easy to manage compared to credit cards. Thus, customers see both the services differently and choose to go with BNPL more as credit cards have hidden charges, compound interest, and penalties.
For merchants, the BNPL service is a little costlier than the credit card system. Usually, merchants pay around 2 to 8% with a flat fee of 30 cents per transaction to BNPL providers. As for credit cards, the charge is 2.9% plus 30 cents per transaction for online and 1% less for in-store transactions. The funds are deposited in the merchant’s account within 2 to 3 days which is again similar to credit cards.
In the end, we want to say BNPL is important for superior customer experience. It helps rally up more repeat customers and build long-term loyalty. As for the eCommerce store owners, you should choose the BNPL service providers that align with your brand’s vision and identity.
With this said, we conclude the article here. You can consult our eCommerce experts if you need more clarification about the best BNPL service provider in the market.