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The Rise Of The Buy Now Pay Later Model In eCommerce—A Game Changer?

Trends come and go in eCommerce. Market segments change at rapid speed; and today’s next big thing could easily go the way of… well, widespread drone deliveries.

It’s no different with financial technology. Despite the buzz over cryptocurrencies like Bitcoin (recently valued at over $40,000 a share), they’ve never really caught on in eCommerce for numerous reasons—not the least of which being its relative volatility and lack of federal insurance.

You may have heard about the “Buy Now Pay Later” model and wondered if it could be an entirely new shift for eCommerce. It’s certainly not widespread—just yet. But is it quite as revolutionary as it sounds? Or is it just one more business model which will eventually fail to launch?

What is the Buy Now Pay Later Model?

From the name alone, you might assume BNPL (Buy Now, Pay Later) is just a novel euphemism for credit card payments. You’d be both right and wrong.

BNPL isn’t particularly new. It actually has a long standing, if not slightly more primitive, precedence in physical retail—namely in the form of layaway plans, where a purchase is made and paid for in variable monthly installments. The only difference is that BNPL is primarily a digital phenomenon. And much like a layaway plan or a credit card payment, BNPL does carry additional monthly interest fees. However, they’re more variable than the former, making it an altogether too attractive model for millennial consumers concerned about falling into credit card debt.

More recently, a number of third party processing platforms have developed in order to facilitate BNPL payments including Afterpay, PayPal Credit, Klarna and Affirm. But are these services really that much different from traditional credit card services and instant loan providers?

Yes and no. The application for both will typically involve a background check. However, BNPL providers tend to be more flexible about credit requirements and are more concerned with a customer’s current ability to make regular payments. Because BNPL is primarily used for high cost purchases, providers know the line of credit is usually short term. Unlike a credit card, customers aren’t going to be using BNPL for everyday purchases; instead, it’s being used chiefly for one-time items which customers would rarely consider purchasing otherwise.

Types of BNPL Loans

  • Fixed Loans. With a fixed loan, a provider sets a schedule in advance of the purchase to guarantee that the customer knows exactly how frequently and how much their repayments are going to be.

  • Flexible Loans. As the name suggests, a flexible loan allows customers to choose the number of payments based on both the cost of the purchase as well as merchant contracts with the provider. However, due to their popularity, flexible loans tend to rely more on a customer’s credit score.

  • Micro Loans. A micro-loan grants a much smaller loan to a customer prior to completing a purchase. The customer will then pay the remainder on a fixed repayment schedule but typically at a higher interest rate.

The Benefits of BNPL in eCommerce

Ironically, the greatest benefit of BNPL might also seem like its greatest risk: high merchant fees. Typically, the fee for credit card processing in eCommerce hovers around 2.9 percent of the purchase, with an additional $0.30 for non in-store purchases. But BNPL processing fees can fluctuate wildly, reaching all the way up to 8 percent of the purchase. Why is this a benefit?

Because retailers move more higher end inventory. Unlike a traditional credit card, BNPL is a short term line of credit—which means a customer’s credit history is nowhere near subject to scrutiny. Higher end merchandise is notoriously slow moving, even during the holidays; and with 31 percent of Americans reporting a credit score of less than 670, a merchant’s line of luxury items is opened up to an entirely new audience who would otherwise be ineligible for a long term line of credit.

And it’s becoming more popular. According to a 2020 survey from data analytical firm, 44 percent of Americans surveyed indicated BNPL would be a deciding factor in their holiday purchases, with 48 percent reporting that BNPL options would allow them to purchase at least 10 percent more than they would with a traditional credit card.

The Risks of BNPL in eCommerce

Despite digital monthly installment payments having an 87 percent share of interest among consumers aged 20 - 44, only 22.1 percent of Americans indicated they fully understand how BNPL works. This low visibility, coupled with wildly varying finance solutions and merchant fees, has led many retailers to grow hesitant about offering it. For smaller businesses, the fees can be far too exorbitant to even be considered an option. In fact, even Amazon is shy of promoting BNPL as a payment option, instead encouraging traditional credit and debit card payments.

The greater risk is to consumers. If merchant fees vary wildly, interest rates can be even more dramatic. There’s simply no universal benchmark. Some BNPL providers can charge a flat fee of $5.99 per purchase, while others can reach as high as 30 percent. A customer’s credit score may not necessarily preclude their eligibility but it can dictate their interest rate. There’s a reason why only 3 in 10 Americans are considered financially healthy; and BNPL certainly doesn’t mitigate the problem by encouraging overextending shopping habits. In fact, Capital One—an early adopter of BNPL payment options—recently barred customers from using the service, stating that the transactions were “risky for customers and the banks that serve them.”

Is BNPL Right For My Business?

If 48 percent of Americans have indicated they’d be willing to spend more using a BNPL option, then it would certainly make sense to offer it. If you find the right provider.

Unfortunately, that may be more trouble than it’s worth. Because BNPL providers are generally exempt from many forms of credit card law with the exception of fraud, the market is unregulated. That’s why both merchant fees and interest rates can diverge so dramatically. Terms and conditions can be based on both monthly minimum purchases as well as volume. BNPL involves much finer print than other financing terms; and if you’re new to eCommerce, you may not simply have the time. But on the other hand, if you’re seeing that even heavily discounted merchandise is slow to move, BNPL can both increase conversions as well as customer traffic—particularly among millennials, who historically represent BNPL’s largest audience.

Ultimately, eCommerce is a constantly evolving process. And BNPL is part of that process. The question isn’t whether or not it’s right for you. The question is whether or not it’s here to stay.


Color More Lines provides white glove, global account management of your eCommerce platforms so mission-driven companies can focus on new product development, branding and growth strategies. Find out more at Color More Lines.

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