BNPL Meaning—an Intro to Buy Now, Pay Later for Sellers and Shoppers
Updated · Jul 20, 2022
In recent years, a new form of payment has been gaining steam in the world of ecommerce.
Known as "buy now, pay later," or BNPL, this option allows shoppers to purchase items immediately and spread the cost over time, interest-free.
Thanks to the convenience and flexibility, buy now, pay later is quickly becoming the preferred choice for many online shoppers and a powerful tool for sellers.
Join us as we explain the whole BNPL meaning and investigate the pros and cons for all involved.
What Is BNPL?
Buy now, pay later is not a new form of payment. It’s long been available for larger purchases like furniture or cars.
It has, however, only recently become a popular option for everyday items like clothing and cosmetics. It’s also become more prevalent thanks to payment gateways partnering with BNPL providers to offer it.
How Does BNPL Work?
For sellers, adding it as a payment method is as easy as adding any other.
You simply have to use an integration or select the option if your payment gateway offers it. That’s all there is to it.
The complex part of the process is the interaction between the buyer and the BNPL company.
The buyer pays a percentage of the total cost upfront, and the provider pays the seller the remaining amount.
The buyer then repays the BNPL provider in equal installments over time. The installments are split evenly over a defined period.
Usually, it’s four payments, paid once a month or every two weeks. Most importantly, the buyer doesn’t pay a higher price for splitting the payments like this.
A Practical Example
A buyer wants to purchase a pair of headphones for $80. Instead of paying the total amount, they pay $20.
The BNPL company pays the outstanding $60 to the seller. The seller then fulfills the order by shipping headphones to the buyer.
The buyer has two weeks or a month to pay another $20, then another, and another to the provider. After this, the BNPL repayment is complete.
BNPL for Consumers
This payment arrangement seems almost too good to be true, and, naturally, there is a catch. Let’s examine the pros and cons of using BNPL as a consumer.
The pros for buyers are all about the possibility to purchase an item — or several — quickly.
The first big pro is that consumers don’t have to pay any interest if they keep to the agreement. If an item is $60, then $60 is all they will pay.
Other types of pay later financing can often see consumers paying twice the price an item is worth at the end of it all.
For this reason, it can be a valuable alternative to having a credit card and racking up interest.
No Effect on Credit (Initially)
Speaking of credit, these types of payments won’t affect a consumer’s credit rating at first. They’re essentially self-contained loans.
BNPL companies run credit checks but are more lenient than traditional financing outlets.
There are two main cons to BNPL for consumers, and one feeds the other.
There’s a psychological aspect to pricing. When buyers see a price tag of $200, they may be put off, but if the price is represented as “$50 x 4”, those smaller numbers are much more palatable.
This is good for sellers, as we’ll discuss soon, but it can lead to buyers overspending. It might feel like they’re making small purchases when using BNPL, but that isn’t the case. They’ll have to pay it all back in full…
Late and Collection Fees
The late and collection fees for missed payments to BNPL services can be pretty hefty. Remember, payments are usually only four installments, so the deadlines are tight. If consumers take on too many payments, they could fail to keep up.
If left too long, the debt will be passed off to debt collection agencies, and then their credit score will be affected.
BNPL for Sellers
While the pros and cons are balanced for buyers, using BNPL as a seller is weighted in favor of the pros.
For sellers, the pros are all about “reducing friction” in the purchasing process.
As we’ve mentioned, sellers get the cash upfront. It’s no different in terms of pure income than a buyer paying the total amount.
While it is possible to implement an in-house BNPL business model, we advise against it.
With in-house, you won’t get the cash up front, and you’ll have to do the work of trying to collect.
Less Cart Abandonment
The next benefit is reduced cart abandonment. Statistics show that one of the key moments that makes shoppers abandon their shopping carts is the total cost of everything they want to buy.
As mentioned earlier, split pricing makes the total figure more palatable. This, in turn, means...
Ultimately, offering a more convenient way to pay and lessening cart abandonment means an increased conversion rate.
BNPL is also very likely to increase the average order volume due to buyers having to pay less upfront.
What is one BNPL negative for businesses?
It is significant, and it has to do with the perception of BNPL at large.
Because BNPL makes prices more palatable without actually changing them, it offers a type of credit to people who may already have bad credit, and it could lead to overspending; many critics say it’s predatory.
This could lead to negative brand association. To counterbalance this, be upfront about how these payments work.
Most businesses we’ve seen implementing BNPL are content to let it speak for itself, but if you want to foster trust, it’s worth warning customers about how it works.
It’s also vital to partner with a reputable BNPL service, such as Affirm or Klarna.
Now you know the meaning of BNPL. It can be a helpful way for buyers to purchase items at a reduced initial cost and an excellent way for sellers to boost their sales.
That said, if a buyer is considering making use of it, it’s likely they’re working with a low income, and so they should budget carefully.
On the other hand, sellers should implement the tool responsibly and be transparent about the practice to grow a sustainable business.
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Garan is a writer interested in how tech reshapes the environment, and how the environment reshapes tech. You'll usually find him inoculating against future shock and arguing with bots.