Buy now, pay later overview for small businesses

Buy now, pay later (BNPL) is a topic that gets a lot of attention these days. If you look online, there are many articles (1, 2, 3) discussing what BNPL is, but only a few provide the context you need to partner with a provider as a business owner. This is a problem - not all financing providers are the same!

So, as a business owner, what information do you need to choose a financing provider? How are the various providers different? This article provides an overview of the BNPL space, the pros and cons of many of the main players, and the criteria you should keep in mind when evaluating providers on your own. 

^‍Background

When customers can’t pay for an item or are intimidated by the sticker price, they often ask for financing at the point of sale (POS). While POS financing comes in different forms - installment loans, lease to own, white-label solutions - each of these allows customers to take an item home without having to pay the full price at checkout. 

The lines separating each type of POS solution can get blurry. Read the following section for a better understanding of POS financing in general and BNPL financing (as a subset of POS) in particular. You can also talk to Hansa directly: reach out to info@withhansa.com and schedule a free consultation at your earliest convenience. 

‍

BNPL: what is it, how does it work, and what are the benefits?

What is BNPL? 

Buy now, pay later (BNPL) is a type of POS financing that allows customers to pay for some portion of the item up front and the rest over time. Essentially, BNPL is an installment loan for consumers. 

Most people think of BNPL as interest-free financing. However, not all BNPL loans are interest free, and those that are can include other charges, like late fees for customers that miss payments. As a merchant, keep in mind that providers offer different payment schedules, interest rates, and loan terms to different customers. Depending on the customer’s credit quality, a provider may allow the customer to select their terms from a list of options.  

How does BNPL work?

Every BNPL transaction involves three parties: the customer, the merchant, and the financing provider. At checkout, the customer puts up a percentage of the total purchase cost (e.g. 25%) as down payment (though some providers offer loans with zero down payments) and the financing provider covers the rest, allowing merchants to get paid upfront. 

Merchants pay a fee (usually called the Merchant Discount Rate or MDR) to providers for taking on the risks and costs associated with BNPL (e.g. fraud risk, customer credit risk, collecting payments, etc). Although merchant fees vary, they are usually between 2 to 8 percent of the total purchase value. On top of that, some providers charge a flat fee per transaction.

What do I get by offering BNPL?

By offering BNPL as a payment option at checkout (either in-store or online) businesses can expand their customer base, sell more merchandise and increase average ticket sizes. According to PayPal, customers are 64% more likely to make a purchase when offered an interest-free BNPL option. Worldwide, BNPL is growing, with transactions expected to reach $680 billion by 2025 (Kaleido Intelligence). 

^‍‍‍

How to evaluate a financing provider

When evaluating a financing provider, merchants should consider the following criteria: 

1. Cost to the merchant

How much will it cost you to offer a BNPL payment option at checkout? Typically, on any BNPL sale, providers take a commission (ranging from 2-8 percent of the total purchase value) and/or a small fee for processing the transaction. While commission fees vary, the processing charge for each transaction is fixed. As a merchant, make sure the additional revenue you generate through BNPL sales is sufficient to cover fees. 

2. Provider reputation

BNPL hasn’t been around for long, but it’s still important to find a provider with a good reputation. Don’t be afraid to ask for references. Talk to other merchants about their experience with specific providers and be sure to read reviews on sites like Trustpilot or the Better Business Bureau. 

3. Customer experience

Customers often treat merchants and their BNPL partners as one and the same. Again, make sure you read online reviews to see what customers are saying about specific providers. Are customers generally happy with the provider? If not, what are the complaints about? Providers may have good customer service but bad payment terms, and vice versa. Similarly, look at customer reviews of businesses offering BNPL - do their customers refer to any negative experiences?

Check payment terms yourself. Find out how much interest (if any) providers are charging, and whether or not providers charge customers a late fee for missed payments. Transparency is key - nobody likes hidden charges.

4. Channel availability

Some financing providers work with online businesses while others work with brick and mortar businesses, and some do both. Choose a provider that can integrate with your payment systems easily. 

As a brick-and-mortar business, you may need to purchase a tablet and download your provider’s application. If you’re an online business, look for providers with plugins that support your specific e-commerce platform. Adding BNPL to your website should require a few lines of code at most.

5. Customer credit spectrum

BNPL can enable your business to sell more merchandise by serving customers who want to pay for your products over time, rather than all in one go. Here is where customer credit quality comes into play. Does the provider have low or high approval rates? Alternatively, do they specialize in approving customers within a certain credit band?

As a merchant, you want to cast a wide net, so choose a provider that works across the whole credit spectrum. For customers with good credit, there should be zero-interest loans on offer. For customers with low credit, longer-term loans (with interest) and other POS solutions like lease to own should be available. Your financing provider should offer something for everyone - don’t let customers fall through the cracks.

6. Industry/Product Type

Some providers specialize in durable goods (e.g. tires, home appliances) while others specialize in discretionary goods (e.g. clothes). However, many providers don’t specialize at all. As a merchant, choose a provider that deals with businesses similar to yours in product type, price, scale, cost structure, etc. 

BNPL can be particularly helpful to merchants who sell big-ticket items, as the option to pay over time attracts customers who might otherwise avoid large purchases. If you’re a big ticket seller, find providers with large transaction maximums. 

Also, since BNPL can encourage trial purchases, make sure you understand return policies. Find out whether the onus is on you or the financing provider to grant refunds. In some cases, providers do not allow refunds; in others (like lease to own) providers can process a refund after confirming that the customer returned the product. 

7. Onboarding experience for merchant

Another thing you should consider when evaluating financing providers is the onboarding process. How many hurdles do you have to jump before you can offer BNPL to your customers? Expect to go through a process of registering an account and submitting detailed business information to get started. 

In general, choose a provider that can get you up and running quickly and efficiently. You also want to be confident the provider will help you out if you have any snags getting set up or using their service - ask about their merchant support uptime and response times!

8. Marketing

Many financing providers offer marketing services to their clients. As part of onboarding, ask your provider for marketing kits; banners, buttons, and other displays that you can have on your website (or in-store) to announce that financing is available. More importantly, find out whether the provider will market on your behalf (e.g. by listing your business on their website or driving shoppers to use their services at your business). 

‍

Key Players

‍

‍Klarna

Klarna is one of the most widely recognized BNPL providers. Klarna is known for flexibility. They offer three different payment plans to consumers: “Pay later” (paying 14 to 30 days after purchase), “Slice it” (equal installments over 3 months to 3 years) and "Pay in 4” (four equal biweekly installments). Merchants typically pay a flat fee of $0.30 and a variable fee between 3.29% to 5.99% of the total purchase value, depending on the plan. 

Pros: 

• Customer experience: Klarna gives your customers flexibility, offering three different payment options‍
• Customer experience: Klarna offers fraud insurance for both you and your customer‍
• Marketing: Klarna will market on your behalf ‍
• Channel availability: Klarna works for online and in store purchases

Cons: 

• Customer experience: Klarna “slice it” plan includes up to 25% interest and $7-$35 in late fees 
• Channel availability: Online businesses that use Square or PayPal may have issues integrating with Klarna
• Channel availability: Klarna can only integrate to your in-store check out experience if you use Verifone or Vend POS systems

Best for: 

• Businesses selling “non essential” or luxury items online, in-store, or both

‍

Affirm

Affirm is a BNPL provider known for not charging late fees. Customers can pay-in-four or pay in up to 48 months (with or without interest). Merchants typically pay a flat fee of $0.30 and a variable fee between 4% to 6% of the total purchase value, depending on the plan. 

Pros:

• Channel availability: Affirm is available for online merchants though customers can use Affirm at brick and mortar merchants by using the mobile app
• Marketing: Affirm can promote your business through email and custom marketing campaigns, and give you access to its influencer network
• Industry/product type: Affirm offers financing for transactions up to $17,500 transactions, a high maximum

• Customer experience: No late fees

Cons:

• Customer experience: Late payments can impact the customer’s credit score
• Customer experience: Interest rates as high as 30%

• Channel availability: No embedded brick and mortar solution

best for: 

• Online sellers of big ticket items

‍

PayPal Pay in 4

Online sellers who have a PayPal setup can simply add a “Pay Later” button (for free) as another option at checkout. Customers with an existing PayPal account can apply for financing on purchases between $30 and $1,500.

Pros:

• Customer experience: No interest or late fees for customers
• Customer experience: Offers purchase protection

• Cost to merchant: Free to add to your current PayPal setup 
• Provider reputation: PayPal has in built brand reputation and trust

 CONS:

• Channel availability: Seller must have a PayPal setup
• Channel availability: There is no storefront solution

• Industry/product type: PayPal only offers financing for transactions up to $1,500

• Customer experience: Few repayment options available
• Customer experience: Customers must have a PayPal account

BEST FOR:

• Online sellers who already use PayPal 

‍

Afterpay

Afterpay is a simple financing solution that breaks a customer's purchase down into four smaller payments. Your customers make interest-free payments and you get your money upfront within 48 hours of the purchase, guaranteed. Merchants typically pay a flat fee of $0.30 and a variable fee between 4% to 6% of the total purchase value, depending on the plan.

PROS:

• Customer credit spectrum: When opening an account with Afterpay, customers don’t go through hard credit checks 
• Customer experience: High ratings on third party review sites (4.78 out of 5 stars averaged over multiple sources)

CONS:

• Customer experience: Afterpay only offers pay-in-four financing
• Customer experience: Customers are charged the lesser of 25% of the purchase or $8 in late fees

• Channel availability: Afterpay only integrates with 12 ecommerce platforms directly

BEST FOR:

• Businesses that use square and cater to Gen-Z customers

‍

Sezzle 

Sezzle focuses on offering transparent BNPL services as well as financial education, with the hopes of empowering younger consumers to make better choices. Merchants typically pay a flat fee of $0.30 and a 6% commission fee.

PROS: 

• Provider reputation: Named #1 Installment Payment Software by G2 in Fall 2021 because of its excellent customer service
• Customer experience: Customers can change their payment schedules up to three times
• Merchant experience: Sezzle offers interest bearing savings accounts to merchants

CONS: 

• Channel availability: Sezzle does not offer an in store payment option
• Customer experience: Customers may pay $5 for rescheduling payments or $10 in late fees 

Best for: 

• Online businesses that place a premium on their customers’ experience

‍

Acima

Acima offers lease to own financing where customers can buy merchandise at the end of 12, 18 or 24 month leasing periods. 

Pros: 

• Customer experience: Customers can request early-purchase options to lower costs
• Merchant experience: Acima is available in Spanish 

• Marketing: Acima will provide you with POP materials and market on your behalf through their Acima browser extension
• Customer credit spectrum: There is no minimum credit score requirement
• Customer credit spectrum: Only $1000 of monthly income is required (over the last three months) to qualify

CONS:

• Customer experience: Customers pay a marked up price and lease costs (together, these two factors can cause the customer to pay double the original price of the item)
• Provider reputation: Acima has over 400 complaints (focused on billing and collections) with the Better Business Bureau in the past year

Best for: 

• Big ticket sellers with a customer base (e.g. Gen Z) that is new to credit

‍

Snap Finance

Snap offers lease to own financing with lease periods of up to 12 months. There is also a 100-day payment option that helps you pay off your purchase in less time.

Pros: 

• Customer credit spectrum: There is no minimum credit score requirement
• Customer credit spectrum: Only an active checking account is needed to qualify

• Customer experience: Payments come out of checking accounts automatically, which helps customers avoid late fees

Cons:

• Customer experience: High lease costs

Best for: 

• Big ticket sellers with a customer base (e.g. Gen Z) that is new to credit

‍

Katapult

Katapult offers lease to own with flexible payment options and instant approvals for up to $3,500 transactions.

Pros: 

• Customer experience: Customers can request early-purchase options to lower costs
• Channel availability: Katapult works for in store and online purchases
• Marketing: Katapult provides marketing resources on their website

Cons: 

• Customer experience: If you don’t pay the lease off early, it can double the cost of your purchase
• Provider reputation: Katapult is relatively new and does not have strong name recognition

Best for: 

• Online businesses offering big ticket items to a customer base that is new to credit (e.g. Gen Z)

‍

‍Koalafi

A financing provider for essential purchases, offering consumers up to $7,500 in lease-to-own funding, $10,000 in BNPL loan funding, and up to $65,000 for home improvement loans.

Pros:

• Customer credit spectrum: Can serve a wider variety of customers by offering both lease to own funding and BNPL loan funding 

• Customer experience: One application for all customers regardless of credit quality, which cuts down on declines and the discomfort of walking a customer through another application after a decline

• Industry/product type: Offers more in lease to own financing (up to $7,500) than other LTO providers 

• Marketing: Koalafi provides in-store and online marketing resources

Cons:

• Industry/product type: Koalafi serves a limited number of industries. Koalafi focuses on merchants who offer essential goods or services such furniture, mattresses, appliances, tires, and home improvement services. If your business offers more discretionary items like jewelry or high fashion apparel they won’t be a good fit. 

Best for: 

• Merchants offering big ticket items in the furniture, mattress, appliance, tire or home improvement industries who want a one stop shop for customers all over the credit spectrum

‍

At Hansa, we can recommend the right financing solution for your business and your customer. Reach out to info@withhansa.com and get a free consultation (in English or Spanish) with a Hansa expert. Ask as many questions as you want!