Pros and Cons of “Buy Now, Pay Later” for Online Businesses

In an ideal world, when a customer purchases a product, the business receives the payment right away.

However, with so much market competition, along with economic downturns affecting consumers’ purchasing power, businesses need to get creative to retain customers and increase sales.

The “buy now, pay later” (BNPL) solution is attractive to consumers looking for a more affordable​​ way to acquire a product or service. According to the Federal Reserve Bank of Boston, the share of consumers using BNPL increased by roughly 40% in the last two years.

These payment plans are great for consumers — but how about online shops?

Are there business benefits to offering “buy now, pay later” solutions? Or, more importantly, are there disadvantages? If you’re an online shop considering this strategy, keep reading.

What Is Buy Now, Pay Later?

“Buy now, pay later” agreement is a type of point-of-sale financing that allows customers to purchase goods and services on credit, usually on an installment basis.

When consumers make a BNPL purchase, they agree to a short-term loan with fixed payments and no interest. This differs from using a credit card to buy something, as the credit card generally charges interest on balances carried over the next billing cycle.

BNPL conditions vary by bank or third-party provider, but generally, the buyer makes a small down payment on the overall purchase amount and then pays off the remaining balance over time. If the balance is not paid in full by the time the grace period ends, consumers will typically have to pay interest.

The global Buy Now, Pay Later market was valued at $6.38 billion in 2023 and is expected to swell to $7.96 billion by 2030. Experts attribute the growing popularity to the rise of online shopping, cashless payments, and younger consumers’ preference for installment plans.

Many online and in-store businesses offer BNPL options to make shopping more affordable while simultaneously increasing sales.

Pros of Point-of-Sale Financing for Online Business

A wider customer base, more revenue, and better online experiences are among the advantages for businesses that offer point-of-sale financing, otherwise known as BNPL. Here’s why:

Higher Conversion Rate

Since 2012, the number of online shopping orders that are abandoned in carts has hovered around 70%. Some estimates say online businesses lose a whopping 75% of sales due to the abandonment of online shopping carts.

To better engage those consumers forced to stop purchases at checkout, businesses can offer point-of-sale financing to help them access desired goods and products during a tight financial situation. It also allows customers to take advantage of sales and promotional discounts, increasing a business’s sales volume and order value.

Increased Average Order Value

The Average Order Value (AOV) is the average amount a customer pays when they make a purchase. Many online shops have seen order values increase between 20% and 30% after implementing a “buy now, pay later” financing system — some retailers experiencing an increase as high as 73%.

The Consumer Financial Protection Bureau says the average individual order value financed by a BNPL loan in 2021 was $135, up $14 year-over-year.

The reason? Smaller payments spread out over time increase a customer’s purchasing power in a way that feels more manageable than other payment options like credit. Experts say that U.S. consumers use BNPL to avoid credit card interest charges or purchase products that would otherwise not fit their budget.

Wider Audience

By splitting up purchases over three, four, six, or more months, online shops can make big purchases a lot more affordable. By doing so, businesses can reach a wider audience, including younger Generation Z and millennial shoppers, who are historically more accustomed to using BNPL financing.

Affordable, Flexible Payments for High-Value Products

Business that offer high-value products, such as jewelry and electronic devices, can leverage “shop now, pay later” solutions to increase order conversion.

By enabling customers to pay in increments, merchants can easily introduce their top revenue-generating products and services to a broader client base.

Improved Customer Experience

A positive customer experience generally translates to more sales, as consumers are happier when given more control over their purchasing decisions. Providing flexible payment systems and financing options is one way to empower your customers.

Cons of Point of Sale Financing for Online Business

As with any financing option, the “buy now, pay later” model has drawbacks businesses must consider. Below are some of them:

Higher Merchant Fees

BNPL systems come with transaction fees that are passed on to the merchant, usually ranging from 2% to 6% of the customer’s purchase amount. These fees are higher than standard credit cards, which typically run between 1% and 3%.

Some BNPL apps also pass on fees to the customer for late payments. If this condition is not properly explained to the buyer at the time of purchase, it could impact the overall experience and the business’s bottom line.

Integration Challenges

Businesses integrating the “buy now, pay later” mode of payment in their shop’s checkout process should expect some upfront effort to get the program up and running. It requires specialized tools and technology, which can often add to the expense incurred by the merchant.

Financing experts recommend going with a third-party BNPL, as they offer lower costs than traditional banks and straightforward integrations.

Regulation Challenges

Businesses have to meet certain criteria to qualify for the “shop now, pay later” method. Certain businesses, such as tobacco and gaming companies, are not eligible for this financing option.

Plus, the Consumer Financial Protection Bureau recently announced protections for consumers who use BNPL, which businesses must also consider when defining a process for offering financing.

New regulations require BNPL lenders to investigate consumer disputes, refund returned products or canceled services to consumers’ accounts, and provide consumers with periodic billing statements.

Confusing Deals From Different Providers

“Buy now, pay later” services differ among providers, and choosing a package that best suits each business can be confusing.

It’s important to fully understand the terms and conditions of the BNPL provider and compare their rates to choose the best budget-friendly and efficient package. This includes investing in training and additional implementation guidance for team members to avoid hiccups that could damage their reputation.

BNPL Financing Encourages Consumer Debt

While BNPL products benefit the consumer, the financing makes it easy for consumers to overspend. The CFPB found that users of BNPL loans often have delinquencies on their other credit lines, and their credit scores tend to be lower.

If they cannot afford the agreed-upon payments (most BNPL payments are automatic, which could lead to overdrafting), it can put consumers in a difficult financial situation that’s hard to get out of and even hurt their credit scores. Even if consumers take proactive measures to improve credit scores, rebuilding credit history will take time.

Final Thoughts

“Buy Now, Pay Later” has become popular in recent years, and like many financing options, it has pros and cons. Businesses considering BNPL should consider how the program might engage new audiences as well as the reputational risks involved.

They should closely watch BNPL developments to maximize the solution’s benefits and reduce potential impacts on their bottom line.