It’s easy to see the appeal of buy now, pay later (BNPL) options in e-commerce. Shoppers get more payment flexibility and, consequently, more purchasing power — which makes sellers happy.
BNPL use continues to grow in the US, reaching more than 93 million Americans in 2024. The trend that started with Millennials and Gen Z is now catching on with older shoppers too. To consumers, it’s an easy, flexible option that appears lower-risk than credit cards due to the zero-interest aspect.
However, it’s not without drawbacks. E-commerce sellers are becoming increasingly aware of the ethical implications of offering BNPL services at checkout.
The bottom line is: BNPL can be an excellent tool that helps you win sales and new customers — as long as you use it responsibly. Let’s dig in.
What Is Buy Now, Pay Later?
Buy now, pay later is a payment option offered by e-commerce sellers that lets shoppers avoid paying the full cost of their purchase up-front, opting instead to pay in installments over time.
Effectively, it’s a short-term loan through a third-party provider. BNPL agreements usually offer zero interest, since the goal is to remove friction from the sales process.
How Does Buy Now, Pay Later Work?
Customers may have several payment options when they select buy now, pay later at the point of sale. Some common terms include:
- Deferring the full payment for 30 days
- Installments over 2-6 weeks (sometimes up to 10) for smaller purchases
- Longer-term financing (up to 36 months) for larger purchases
If the shopper selects a BNPL payment option, they’re taken through a quick application, and shown options based on their credit score and other factors.
BNPL users must also provide a payment method to complete checkout. Their card or alternate payment method is automatically charged in installments — four is the most common number of payments.
If funds aren’t available when the BNPL provider attempts to collect payment, they’ll charge a fee. In addition, some providers charge service fees and/or interest.
BNPL vs. Credit Cards
If you’re thinking, “How is BNPL different from using a credit card?” you’re asking the right questions. And the truth is, these solutions emerged because of the pain points consumers experienced with credit cards.
Here’s a quick rundown on how BNPL compares to credit cards from a consumer’s perspective.
| Pain point | Credit cards | BNPL |
|---|---|---|
| Common fees | Annual fees, late payment fees, foreign transaction fees | Service fees, non-sufficient funds fees, late fees |
| Interest-free periods | End of the month | Based on loan terms |
| Application process | Complicated, can take weeks, hard credit check | Simpler, quicker, soft credit check |
| Accessibility | Lower approval rate | Higher approval rate |
| Payment method | Not required | Required |
Risks and Costs for Sellers
BNPL solutions give your customers more reasons to say “yes” to a purchase, which helps you make more money — but providing those options also comes at a cost.
As a retailer, you’ll pay a merchant fee to the BNPL provider, ranging from 3-10% of the purchase price, and sometimes paired with a flat fee. Compared to the usual 2.9% payment processing fee for credit cards, BNPL merchant fees may seem quite high. However, because many BNPL solutions take on all credit risk (including fraud and chargebacks) and deliver payment in full to the merchant at the time of purchase, the relative risk to retailers is small — and the potential upsides are significant.
Comparing BNPL Solutions
There are many buy now, pay later solutions on the market, and more are emerging all the time as flexible payments grow in popularity. Here are six of the top BNPL providers and their basic payment terms and fees for shoppers and retailers.
| Platform | How It Works for Shoppers | For Retailers |
|---|---|---|
| Afterpay | 4 payments over 6 weeksNo interest6-12 month installments for larger purchases, rates from 6.99% – 35.99% | $0.30 + 4% – 10% per transaction |
| Apple Pay Later | 4 payments over 6 weeksNo interestPurchases $75 – $1,000 on iPad and iPhone | No fees to merchants |
| Sezzle | 4 payments over 6 weeks2 payments over 2 weeksNo interestMinimum purchase $20Larger purchase financing between 3 – 48 months, rates typically from 5.99% – 34.99%, though 0% may be available | $0.30 + 6.1% per transactionDiscretionary $15/month fee |
| PayPal Pay in 4 | 4 payments over 6 weeksNo interestPurchases $30 to $1,5006, 12, or 24 monthly payments for larger purchases, rates from 9.99% – 35.99% | Included in PayPal Checkout fee |
| Affirm | 4 payments over 6 weeksNo interestPurchases $50 – $1,000Monthly payments for larger purchases, rates from 0% – 36%. | Vary, but reported to be around $0.30 + 6% per transaction |
| Klarna | 4 payments over 6 weeksPay up to 30 days laterNo interestMinimum purchase $10Monthly payments, rates from 7.99% – 33.99% | Vary, but reported to be around $0.30 + 3 – 6% per transaction |
Advantages of BNPL for E-commerce Businesses
There’s no denying the benefits of interest-free installment payments. Some of the seller-side advantages of BNPL include:
- More new customers. With buy now, pay later options, your products are accessible to a wider range of customers. Affirm reports approximately 75,000 new enrollments each month.
- Higher average order value (AOV). Because BNPL reduces the upfront payment, shoppers may choose to purchase more items. One study revealed that BNPL increased AOV by 21% for Shopify merchants.
- Higher conversion rates. When there are flexible payment options, customers are less likely to abandon carts. The above Shopify study also showed that BNPL increased conversion rates by 27%.
- More frequent online shopping. Customers may shop more frequently when there are flexible payment options available.
- Payment in full at the time of purchase. Most BNPL providers pay retailers in full when a user makes a purchase, reducing risk to the seller.
The Ethics of Buy Now, Pay Later
While BNPL solutions offer customers flexibility and convenience, they also raise ethical concerns. As a seller, understanding these concerns is vital to maintaining responsible business practices.
Potential for Predatory Practices
Some BNPL companies have “lived long enough to see themselves become the villain,” so to speak. They have the same underlying predatory tactics as the credit cards they sought to replace.
These may include:
- Astronomical rates for long-term financing
- Hidden fees for late or missed payments
- Targeting financially vulnerable populations
Many experts are particularly concerned about how these payment plans are being used to target young shoppers — those who may not fully understand or anticipate the long-term consequences of missing payments. Martin Lewis, founder of MoneySavingExpert.com, explains:
“There has been an explosion of buy now, pay later (BNPL) lending over the last few years, often targeted at young people, pushed via Instagram and social media, as if it is a form of lifestyle therapy. It isn’t. It’s debt. In fact, it’s the fastest-growing form of credit in the UK…
“[BNPL] can be a useful tool. However, it’s been sold to retailers as an easy way to get people to spend more – this, combined with the younger demographic who use BNPL, is a massive red flag.”
Studies also reveal racial disparities in BNPL use, with Black and Hispanic consumers 63% and 50% more likely to use BNPL respectively.
Phantom Debt Impacts the Economy
Using BNPL often creates “phantom debt,” where consumers have outstanding balances but don’t perceive them as debt. This can lead to overconsumption and financial strain, contributing to overall economic instability if left unchecked.
Missed Credit-Building Opportunities
Unlike credit cards, BNPL transactions usually don’t help consumers build their credit histories. This missed opportunity can make it harder for users to access affordable credit down the line, limiting financial mobility.
Problems With Returns and Refunds
Buyers frequently cite frustrations with the return and refund process when using BNPL options. For example, users sometimes have to continue with the selected repayment plan even after they’ve returned an item. The BNPL provider only refunds the purchase after it’s paid in full — rather than refunding partial payments and canceling the remaining ones. These processing delays can create financial challenges for those living paycheck to paycheck.
How Retailers Can Use BNPL Responsibly: 5 Best Practices
While buy now, pay later solutions can benefit both sellers and shoppers, it’s crucial to approach the offering responsibly. Consider these five best practices to create a great customer experience while upholding ethical standards.
1. Partner with Reputable Providers
Not all BNPL providers are created equal, so it’s vital to do your research before starting a partnership. Evaluate their regulatory compliance, fee structures, and user agreements to make sure they align with your ethics.
2. Protect Customer Data
Prioritize your customers’ privacy with robust data security measures. Never share data with third parties without explicit customer consent. Aim for full transparency on how you handle customer information.
3. Be Transparent About Fees and Terms
Clearly communicate the fees, risks, terms, and conditions associated with BNPL options. Breaking down the total cost to the customer, including interest or late payment fees, empowers informed decision-making.
4. Don’t Market BNPL to Vulnerable Groups
Avoid preying on vulnerable groups: low-income individuals, young adults, or those with poor credit histories. Focus your marketing efforts on financially stable customers.
5. Implement a Clear, Fair Return Process
Clearly outline the steps to get a refund. If possible, make it policy to adjust payment plans in case of returns.
Scale Responsibly With Buy Now, Pay Later
Buy now, pay later lets retailers give customers a relatively low-risk financing option. This makes products more affordable without stifling cash flow. In a challenging economy, this is a big deal for both sellers and shoppers.
Offering BNPL can help you grow your e-commerce business, but doing it ethically takes thoughtful planning and the right financial partners.
Retailers should carefully consider the solutions they use and how they market them to their customers. As always, your decisions should align with the interests of both your brand and your customers.
For more insights on scaling your brand, check out SellersFi’s full suite of e-commerce resources.
