How Does Buy Now, Pay Later (BNPL) Work: A Simple Guide

Buy Now, Pay Later or BNPL has emerged as a highly preferred payment option among consumers, especially when it comes to online shopping. 

In the UK, nearly 40% of consumers used BNPL services in the period starting January 2023 and ending January 2024. 

But why is this a convenient way to purchase products and services and how does it work?

In the following sections, we explore how does Buy Now, Pay Later work in more detail.

What Is Buy Now, Pay Later (BNPL): The Basics

In essence, BNPL is a form of short-term financing or borrowing money that enables shoppers to buy products or services without making a full upfront payment. 

Instead, customers who can’t afford the entire cost of their purchase can make monthly payments in the form of monthly instalments to pay back the amount.

For example, imagine that you want to purchase a new smartphone online but you need to borrow money to cover the costs. In most cases, taking out personal loans means that your providers will charge interest.

BNPL lenders offer access to alternative borrowing with no charged interest, making BNPL loans or Buy Now, Pay Later a good idea for most. 

For instance, the customer could make a £400 purchase, with the option to pay the total amount in four instalments of £100 over a short period of six weeks or a few months with zero interest charges. 

Note that smaller, affordable items can usually be purchased with a BNPL plan requiring the full amount over a few weeks. On the other hand, larger, more expensive products can be paid over a longer period, like several months or up to four years.

Key Features of BNPL Services

In order to fully answer the question of how does Buy Now, Pay Later work, it’s key to assess its key features and the full process.

We already mentioned that BNPL programs can provide short-term loans with fixed payments, interest-free instalments, and no extra charges. Consumers can pay monthly or weekly, depending on the agreed terms and conditions. 

Shoppers can rely on a BNPL app for everyday purchases but can also take advantage of BNPL options via their credit card. If you’re eligible for Buy Now, Pay Later, you can make the rest of the payments via direct debit, bank account, credit card, and sometimes – bank transfers and checks. 

Compared to traditional credit cards and personal loans, Buy Now, Pay Later loans are considered easier and more convenient. 

In short, the key features of BNPL services are:

• Deferred payments; 
• Interest-free instalments;
• Convenient plans; 
• Easy approval without lengthy consumer credit scores checks; 
• Affordable upfront costs;
• Flexible payment methods.

These features make BNPL a popular choice of payment for consumers around the world.

How to Use BNPL for Online Purchases

For shoppers, using BNPL for online purchases is easy. 

Once a consumer decides to purchase from a retailer or another online business, they enter into an agreement. The agreement outlines the terms and conditions of the BNPL program, describing the required instalments and the periods at which they have to be paid.

At checkout, the consumer is required to complete an application. At this phase, the shopper must provide personal information, like name, address, email, date of birth, and others.

The BNPL provider may need to run a quick soft credit check to approve or deny the application. This does not have any impact on your credit score as no new applications for credit are being submitted. 

On rare occasions, the provider may need to also run a full credit check or hard credit check, which could have a negative influence on your credit rating, especially when conducted too often. 

As a business, to be able to provide BNPL for online purchases, you’ll need to select a reliable BNPL provider, set up an account, and provide the BNPL option at checkout. 

The Benefits of Choosing BNPL as a Seller

With the increasing interest towards BNPL, offering this payment option as a seller enables you to cater to a wider audience and witness a boost in profits.

Buy Now, Pay Later is a perfect solution for shoppers who decide to impulse buy without wanting to spend all of their money at once. This service can dramatically increase your sales by making expensive products more accessible to consumers. 

Providing the option to pay in instalments can encourage users to complete their purchases, overall reducing card abandonment rates and boosting conversion rates. 

In addition, you can reach a broader audience and build a stronger customer base with BNPL. This stems from the fact that you’ll be able to sell to those who don’t have immediate funds available but have the desire to purchase over time. BNPL can be especially appealing to younger customers.

Not to mention that you can also see a rise in customer loyalty thanks to Buy Now, Pay Later. This service demonstrates that your business is exploring different avenues to provide convenience and a positive shopping experience. Inevitably, this positively impacts customer satisfaction and loyalty.

Lastly, BNPL services often encourage shoppers to spend more than they originally intended to due to the flexibility of instalments. For companies, this not only means higher average order values, but also a steadier cash flow. 

BNPL Interest Rates and Fees

In most cases, BNPL loans are associated with a 0% interest rate. Of course, this only applies if the consumer makes payments on time. 

However, late payments could mean fees and interest rates, which can sometimes go up to 36%, depending on the terms and conditions of the BNPL provider. 

When it comes to late fees, it’s important to understand that they range dramatically between service providers. For example, some companies charge a late fee of £6 in cases where the consumer hasn’t paid after seven days, with a cap of £24 or 25% of the order value.

Other providers charge a late fee of £5 after seven days of missing payments, where the standard fee will be £5 or 25% of your order value. 

For consumers, it’s key to acknowledge these differences and gain as much information before making an agreement.

As a business, you can help guide customers by making this data available. BNPL providers prioritise offering responsible lending to users and they often require businesses to strictly follow guidelines and communicate transparently with shoppers. 

Safety and Security with BNPL Transactions

A fundamental feature of BNPL transactions to address is their safety and security.

This payment method and alternative form of lending is considered extremely secure, thanks to the advanced encryption technologies utilised to protect sensitive financial data. The information sent between the user, merchant, and the BNPL provider is encrypted, meaning that unauthorised parties can’t access or steal it. 

To achieve a sophisticated level of security, BNPL services integrate with payment gateways that abide by strict security standards and protocols, complying with PCI DSS requirements.

In addition, BNPL services take advantage of modern payment fraud detection systems that rely on AI and machine learning to detect any suspicious behaviour. 

Managing BNPL Repayments Effectively

Although BNPL loans are not always reported to credit reference agencies, they can influence a shopper’s credit file. They’re considered a form of lending. Paying your instalments on time means credit card companies will report payments to the credit bureaus, boosting your credit reports and rating. 

However, missing payments could mean accumulating late payment fees or late fees. As a customer, it’s highly advisable to fully understand the terms and conditions of the BNPL service, plan your budgets accordingly, and set reminders for due payments. 

From a business perspective, integrating with proven and positively rated Buy Now, Pay Later providers is essential. Ensure that there’s full transparency in your communication when it comes to repayment schedules, hidden fees, and more. 

Don’t forget to monitor customer behaviour and repayment patterns in order to enhance your offerings and detect challenges early on. In most cases, it’s helpful to provide customer incentives for making payments on time, like loyalty points, discounts, and exclusive offers.

Common Problems and How to Avoid Them

Although Buy Now, Pay Later offers a myriad of advantages, both for the seller and the consumer, it also goes hand in hand with a few common challenges worth addressing.

For example, overspending and debt accumulation are a possibility, especially for less experienced shoppers with poor budgeting. As a business, this can have a negative impact in cases where the shopper is no longer able to make payments on time, disrupting your cash flow.

To ensure this, you can invest time and effort into educating your buyers on how BNPL works and how to avoid such situations. 

This naturally brings us to the second frequently seen problem – late payments. As a seller, you could consider the options for automating reminders for payment due dates, ensuring that your consumers can keep track of their obligations to your business.

Conclusion 

Overall, Buy Now, Pay Later is a lucrative and popular way to pay for products and services that are slightly out of your financial abilities. This service is also ideal for shoppers who make impulse purchases. 

By offering BNPL as a business, you can dramatically increase your sales volumes, witness rises in Average Order Values, and build a wider and more loyal customer base.

Don’t forget that when partnering with a BNPL provider, it’s key to address all the details associated with terms and conditions. 

Frequently Asked Questions

What happens if a customer misses a payment?

In the case of missed payments with BNPL, in most cases, there are late fees that are accumulated. The missed payment fees will vary depending on the terms and conditions of the BNPL provider.

Does using BNPL affect the credit score of shoppers?

Usually, BNPL won’t affect your credit score as a consumer. However, it can have a negative influence if you miss payments. This depends on whether the BNPL provider reports to credit bureaus.

Who is eligible to use BNPL services?

To use BNPL services, you must be at least 18 years old and have a valid bank account or credit card. Some BNPL providers will need to conduct a quick soft credit check throughout the application process, ensuring that the individual is eligible for the service.