What Is Buy Now Pay Later and How Does It Work?

This article is intended for informational purposes only and does not constitute legal advice or an opinion on any issue.

As a business owner, it’s critical to ensure a hassle-free payment experience for your customers — offering different ways to pay enables customers to choose the option that is most convenient for them. According to the Square 2022 Future of Retail report, consumers want a variety of options for how they pay, no matter where they are making their purchases. Offering a buy now, pay later (BNPL payment) option is one way to make buying easier for your customers.

BNPL services have grown increasingly popular over the past couple of years, and this is partly due retail e-commerce sales reaching record levels during the COVID-19 pandemic, according to a recent study on BNPL services in Canada by the Financial Consumer Agency of Canada (FCAC). Many businesses are already on board — currently, 40% of Canadian merchants accept BNPL payments.

Here’s what you need to know about BNPL and the benefits for your business.

What is buy now, pay later?

BNPL is a type of instalment payment service that allows customers to make purchases without paying the full value upfront. Customers pay the remaining balance in instalments over a defined period of time, usually several weeks or months. BNPL can be used for a range of retail products, and some professional services, including beauty businesses and home and repair services. According to the FCAC study, it’s most popular in the furniture and appliance sectors, which garnered 39% of all BNPL purchases over the study’s period.

Why are buy now, pay later solutions on the rise with consumers?

One of the key attractions of BNPL is that customers pay only one instalment upfront, but get immediate access to their purchase — some customers even qualify for no money down in some cases. The FCAC study revealed that 42% of customers choose BNPL services because it helps them make purchases that otherwise wouldn’t fit in their budget, while 23% say it helps them avoid paying credit card interest and other fees. In fact, BNPL can be particularly useful for consumers who don’t have a credit history, don’t want to use credit cards, or otherwise can’t finance the entire purchase (39%).

Benefits of buy now, pay later for businesses

As a business owner, you receive full payment for the product upfront, and typically only pay a transaction fee to your BNPL provider. The risk of payment collection in most cases is borne by the BNPL provider, so you don’t have to manage debt collection or calculate the impact on your cash flow.

Also, since customers get immediate access to their purchase, you don’t deal with storage challenges common in layaway payment plans, where you hold products until customers complete payment.

Other benefits may include increased average order value and higher cart conversions. When customers have the option to spread the cost over multiple payments, they may choose to add more items to their cart. In fact, Canadian retailers agree that adding BNPL as a payment method has increased conversion rates. BNPL can potentially help you reach more customers, particularly when it comes to high-ticket products and services that they can more easily budget for with multiple instalments.

How does buy now, pay later work?

BNPL payment options are offered at checkout. When a customer chooses the BNPL payment option, the BNPL service provider verifies if they are eligible for the service and provides a decision, usually in seconds. If approved, the customer makes an initial payment, which is typically a percentage of the overall purchase price, say 25%. The rest of the purchase is then spread into a fixed number of payments.

The customer receives information about the exact amount to be paid each time and when those payments should be made. Depending on the BNPL provider used, the customer can typically choose to remit payment manually via cheque or bank transfer and can also authorize automatic deductions of due payments from their bank or debit or credit card.

How to offer buy now, pay later to your customers

You’ll need to integrate a payment platform that accepts BNPL into your point of sale or online store (some eCommerce sites, including Square Online, feature a built-in BNPL option, so no integration is needed when you sign up as a merchant and enable the BNPL payment service provider Afterpay). Once the BNPL payment option is up and running in your existing system, customers will see the option to pay later during the online checkout process.

What are buy now, pay later apps?

Many BNPL service providers have consumer-facing apps that customers can download and discover eligible products to buy as well as participating retailers to patronize. This additional discovery channel is an effective way for businesses to attract new customers. BNPL providers may also have shop directories or marketplaces within the app, offering an additional way for new customers to learn about your business.

Each BNPL provider has their own terms for listing businesses. For some BNPL providers, you simply opt in to their directory service after signing up. For others, you may need to provide more specific information about your business.

How to promote buy now, pay later to your customers

Signing up with a BNPL service provider is only the first step. The next and arguably more important step is to inform your customers about this payment option. You can do this in a number of ways.

Promoting buy now, pay later online

List all the payment options you accept, including BNPL, prominently on your website.

Promote your offerings on social media and in newsletters. This announcement should include useful information about the BNPL option and how customers can take advantage of the service. Avoid any language that pressures customers to use this option and focus instead on just letting them know it’s one of many ways they can pay.

Include information about BNPL on any payment-related FAQ sections you have on your site.

Things to consider before offering BNPL payment options to your customers

While offering BNPL could help drive incremental sales and attract new customers, below are things to consider before taking the bite.

Price of your product

Some BNPL providers have a minimum order amount, and the product types financed by BNPL providers also differ. Some providers cover small, everyday items, while others only offer installment payments for high-ticket products. So, it’s important to do your research and choose a provider that works best for your product price range.

Payment terms for the customer

Ultimately, the goal with BNPL is to offer your customers a flexible payment option. Review the terms of the service provider to ensure they are suitable for your customers. Understanding those terms also makes it easier to educate customers about BNPL.

Fees and charges

Though it may vary, BNPL providers will typically charge both a flat fee and a commission that’s based on transaction value and volumes. Payout times also differ, usually starting at 24 hours. Be sure to compare rates and choose a payment platform that best supports your business. Buy now, pay later services are likely here to stay, and they may offer benefits for your business, from increased average order value to higher conversion rates. Choose a BNPL service provider that will support your business in the long run. And once you’ve set up instalment payments, ensure your current and prospective customers know about the offering by promoting it on your website, email newsletter, and social media pages.

Square customers now have the added flexibility of Afterpay. Afterpay is now integrated with all Square online payment products, including Square Online, Square Online Checkout, Square Invoices, and Virtual Terminal.