Buy Now, Pay Later Explained

A dollar now is worth more than a dollar tomorrow. That’s the underlying principle behind some of our greatest financial instruments, such as interest rates, credit, loans, and even insurance.

Today, we see companies that allow customers to “buy now, pay later” are experiencing increased online sales and reduced cat abandonments by offering more flexible payment options. Customers are also more likely to purchase high priced items when they can split up the payments and pay them off over time.

You may have seen it through Amazon checkout, Paypal or Apple Pay, where you can select to pay an amount over the course of 4 payments (i.e., the Pay in 4) with no interest payment. This allows you to work solely with your trusted payment provider instead of opening a line of credit with a company.

But what is the Buy Now, Pay Later payment method? Should your business offer this? Let’s dive in.

What is Buy Now, Pay Later?

Finance technology has reimagined the concept of layaway -- putting something on layaway means a retailer would let a customer pay in installments, and finally take home the item when the debt was paid in full. Now, customers can receive the product while they pay off their interest-free loan using the “Buy Now, Pay Later” payment method.

Yes it is still a loan, but consider it a micro-loan where companies like PayPal vouch for you to pay the installments in exchange for a small transaction fee to the merchant. The two types of Buy Now, Pay Later loans are:

Merchant Transaction Fee Loan

This point-of-sale loan charges the merchant a transaction fee, and offers the customer a loan at no interest. Examples include payment methods offered by Klarna, Splitit or AfterPay.

‍Is this for my business? This type of loan is typically offered by larger merchants whose margins can absorb the transaction fee for the sake of vastly decreasing cart abandonments and increasing order volumes.

Shopper Interest Loan

Conversely, this point-of-sale loan is offered to a customer by a third-party with a contractual down payment and interest rate, whereas the merchant pays no fee. The customer can receive the item immediately, but must pay installments plus interest.

‍Is this for my business? This type of loan is typically offered by retailers with higher value items. Because potential loss is more detrimental to a business with high value items, loan companies charge customers an interest rate for the increased risk.

Customer Benefits of Buy Now, Pay Later

The customer benefits for offering Pay Later services include:

Increased Sales and Order Volume With Buy Now, Pay Later

Customers are more likely to purchase items when the payments are spread out over time. With tight budgets, customers would still be able to purchase an item even if they don’t have the money at the time of purchase, as long as they are confident that they will be able to pay the bill over the course of the month.

Given some countries reliance on credit (e.g., United States), a customer would be especially more likely to purchase higher priced items when the payments are split into reduced sums.

Not to mention, if you are the first of your competition to offer Buy Now, Pay Later services, this could become a competitive advantage and attract more customers to your brand.

Decrease Cart Abandonments by 6%

According to recent studies, 6% of cart abandonments are caused by a lack of payment options. If your website has high traffic volume, this could spell thousands of dollars in lost revenue. In today’s realm of e-commerce, your shopper journey must have every consideration in mind. Offering more flexible payment options allows you to stay competitive.

This also simplifies the checkout process, because customers don’t have to enter their card details or billing information; instead, they just need to log in with their payment provider (e.g., PayPal, Klarna, etc.). By logging into a payment provider, customers may also feel more secure about not having to share their personal data with the company.

Improve Return Experience and Build Trust

Buy Now Pay Later fits seamlessly into your product return experience. While many customers are not able to sample or try products, they can now take your products for a test drive without committing financially. This simplifies back-end accounting and budgeting.

How to offer Buy Now, Pay Later

You can affiliate with an app that offers “buy now, pay later” services, like the free Klarna application that offers Pay in 4 options, partners with global retailers, and offers reward programs for users.

You can also integrate your checkout process with a Buy Now, Pay Later service. According to G2, the top Buy Now, Pay Later services are:

1. FuturePay: FuturePay is a payment option that lets your customers buy now and pay later – without a credit card.
2. PayPal: With PayPal credit card processing (Payments Standard, Payments Pro, or PayFlow) you can accept all major payment types from your customers right on your site. Simple checkout buttons or fully customized online checkouts enable scalable solutions for businesses of any size.
3. GoCardless: GoCardless is an online payment tool that makes collecting by Direct Debit easy for everyone from individuals to large corporations at 1% fee per transaction.

Wrap It Up

The Buy Now, Pay Later payment method gives customers flexibility, and allows merchants to offset risks and protect themselves from loss in the process. The Buy Now, Pay Later method increases customers’ likelihood of purchasing items, especially those of higher value. If your competition is already using this option, it may be a good time to look into it for your business.