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Buy Now, Pay Later: Should You Offer Installment Payments?

Make no mistake: shoppers want more flexible (and affordable) payment options. 

Over the last year, we’ve seen that offering your customers point-of-sale financing or installment payments — often referred to as “buy now, pay later,” or BNPL — will almost certainly increase your profits.

But how do these solutions work exactly? What are the benefits (and risks) for both shoppers and retailers? We’re taking a closer look at the BNPL trend so you can make the right decision for your business.

The scoop on BNPL

  • Definition of Buy Now, Pay Later
  • How do installment payments work?
  • Using BNPL Solutions as an Online Retailer
  • How does buy now, pay later work for shoppers?
  • Comparing BNPL Solutions
  • Take Advantage of BNPL — Responsibly

What’s the actual definition of Buy Now, Pay Later?

The concept behind buy now, pay later (sometimes also called shop now, pay later) is pretty self-explanatory: At checkout, shoppers can choose to break up the cost of their purchase and pay in installments over time, rather than paying in full up-front. The BNPL solution effectively functions as a short-term loan made at the point of sale. 

How do installment payments work?

Depending on the BNPL solution provider used, customers may have several installment payment options when they visit an e-commerce store. Some of the most commonly used options include:

  • Deferring the full payment for 30 days
  • Paying in interest-free installments over 2-4 weeks
  • Longer-term financing (up to 36 months)

These customer-friendly installment payments often come with zero interest (or an incredibly low-interest rate) and make it easier for shoppers to click that “Checkout” button. 

Buy now, pay later vs. credit cards

If you’re thinking, “How is buy now, pay later different from using a credit card?” you’re asking the right questions. And the truth is, these solutions emerged because of credit cards and the many pain points consumers experience with them, including high fees and penalties, super short interest-free periods, and complicated application processes. 

But compared with credit cards, buy now, pay later solutions have a different set of advantages and drawbacks — for both retailers and consumers. 

Using BNPL solutions as an online retailer

It’s clear that consumers love installment payment options, which can have a significant impact on retailers’ bottom line. But sellers need to consider all sides of the equation before deciding to offer buy now, pay later for their customers — namely, what are the risks or drawbacks for online stores offering installment payments? 

Advantages of BNPL for e-commerce businesses

First, a deeper look at the pros. BNPL providers are quick to point out the benefits of installment payments for e-commerce businesses, and many of these are valid. 

Some of the potential seller-side advantages of BNPL plans can include:

  • A boost in new customers. With flexible payment options, you may make your products accessible to a wider range of budgets — and earn more new customers. 
  • Higher average order volume (AOV). Because buy now, pay later reduces the upfront payment, shoppers may choose to purchase more items.
  • Fewer cart abandonments. Customers may be less likely to abandon their carts when there are flexible payment options available. 
  • Fewer returns. Some BNPL solutions report lower return rates compared with other payment types. 
  • More frequent shopping. Customers may shop more frequently when there are flexible payment options available. 
  • Payment in full at the time of purchase. Many BNPL providers ensure that retailers receive the full purchase payment immediately and don’t have to assume credit risk.

Drawbacks of BNPL for E-commerce Businesses

In light of these enticing promises, you might be wondering, “What’s the catch?” But to explain that, it helps to understand how the buy now, pay later business model works. 

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 2-8% of the purchase price, and sometimes paired with a flat fee. 

Are installment payments worth it for online retailers?

Compared to the usual 2.9% payment processing fee for credit cards, buy now, pay later 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 quite small — and the potential upsides are significant. 

Another valuable point to consider is that buy now, pay later is extremely popular among Millennials. Consumers are increasingly eager to avoid credit card interest, which makes interest-free installment payments even more appealing. The impact of Covid-19 has accelerated the growth of BNPL solutions even further, with many providers seeing 200+% increases during the pandemic. 

How does buy now, pay later work for shoppers?

It’s clear that consumers love having more flexible options when shopping online. But you may be wondering whether there are any risks for your customers when they use these options — and whether it’s even ethical to offer them. 

The truth is, it depends on the solution you choose. Here are a few key elements to consider: 

  • Repayment periods and payment frequency. Some solutions only offer short-term repayment periods (typically 4-6 weeks) with weekly installments, while others provide financing for up to 36 months. 
  • Interest and late fees. There are many BNPL providers who charge no interest on installment payments as long as those payments are made on time. Some charge interest from the beginning, and others will only do so after a payment is late. Other providers charge fees for late payments. Interest rates may be based on credit. 
  • Eligibility and approval. Some buy now, pay later providers offer guaranteed approval to shoppers, while others will require an eligibility check. 
  • Spending limits. Many BNPL solutions will place limits on spending, with opportunities to increase the limit as purchases are paid off on time. 

The ethics of Buy Now, Pay Later

Of course, the risks associated with buy now, pay later are dramatically different for shoppers who handle their finances responsibly, and those who do not. 

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, 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.” 

The growth of BNPL has brought it under scrutiny, with experts like Lewis recommending regulatory guardrails to protect consumers. 

If you want to offer installment payments as part of your e-commerce store, you’ll want to review the terms and conditions for both your business and your customers — but particularly if your brand targets a younger consumer demographic. And keep an eye out for future regulations in this area. 

Comparing BNPL solutions

There are numerous buy now, pay later solutions, and more are emerging all the time as flexible payments grow in popularity. Here are seven of the top BNPL providers and their basic payment terms and fees for shoppers and retailers. 

PlatformHow It Works for ShoppersFor Retailers
AfterpayShoppers make 4 interest-free payments over 6 weeks. Merchants pay $0.30 + 4-6% depending on the value and volume of transactions processed
Klarna Shoppers can pay in 4 interest-free installments every two weeks; delay payment for 30 days; or finance up to 36 months. Merchants pay up to $0.30 + 5.99% per transaction.
SezzleShoppers make 4 interest-free payments over 6 weeks. Merchants pay $0.30 + 6% per transaction.
PayPal Pay in 4Shoppers make 4 interest-free payments over 6 weeks (only available for shopping cart values between $30 to $600).The ‘Pay in 4’ option is included in the merchant’s existing PayPal rate. 
AffirmShoppers can select a payment plan ranging from three months to three years. Interest can vary from 0-30% based on credit. Not disclosed — terms are agreed upon between Affirm and merchant (although reported to be 2-3%)
Splitit Interest-free installments are held and paid from the shopper’s credit card or debit card. The maximum purchase through a debit card is $400.Merchant fees start from 1.5% + $1.50 per installment if they receive funds as the customer pays, or 3% + $1.00 per installment if they receive the full cost of the purchase up front. 
QuadPayShoppers make 4 interest-free payments over 6 weeks. QuadPay users can also use their account with their digital wallet and make installment payments on in-store purchases as well.Not disclosed — terms are agreed upon between QuadPay and the merchant. 

Take advantage of BNPL — responsibly

With ‘buy now, pay later,’ retailers have the option to provide a relatively low-risk financing option and make their products more affordable, with little to no repercussions for their cash flow. The value of that for business owners and consumers alike cannot be understated, especially given the economic impact of the Covid-19 pandemic. 

However, e-commerce businesses should carefully consider the solutions they use and how they market them to their customer base. As always, make sure you’re making decisions based on the best interests of your brand and its customers.


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