How Buy Now and Pay Later (BNPL) Works in the Retail Industry?

The retail industry has been constantly innovating in order to become financially more viable. There are several innovations which have been introduced in the retail industry. However, very few innovations have been as effective as the Buy Now Pay Later (BNPL).

The use of Buy Now Pay Later (BNPL) payments has been increasing over the years. It is for this reason that every retailer is forced to consider integrating Buy Now Pay Later (BNPL) with their sales strategy.

In this article, we will have a closer look at what Buy Now Pay Later (BNPL) is and how retailers use BNPL schemes in order to be able to improve the financial position of their business.

What Is Buy Now Pay Later?

Buy Now Pay Later (BNPL) is a mechanism of payment which allows consumers to buy products on credit. As the name states, the consumers can buy the product immediately and take possession of the same. However, they can pay in instalments over an extended period of time.

Prima facie, Buy Now Pay Later (BNPL) loans appear to be very similar to credit cards or personal loans. However, these loans are different since the lender does not need to conduct a hard credit check in order to disburse these loans. Also, consumers are not required to pay additional interest or processing fee in order to avail such loans.

Retailers have started increasingly integrating Buy Now Pay Later (BNPL) loans into their business. In this article, we will have a closer look at how these loans are made available to the consumers.

1. Selecting a BNPL Service Provider: Once the retailer decides to provide Buy Now Pay Later (BNPL) services to their consumer, the first step that they need to do is that they need to decide on a service provider. They need to select a service provider which has a high rate of approval and a faster turnaround time.

   It is common for retailers to tie with banks or traditional lenders for this purpose. However, there are many new age service providers which specialize in Buy Now Pay Later (BNPL) loans. For instance, Klarna is a startup unicorn which is commonly used by many retailers when they want to offer Buy Now Pay Later (BNPL) loans.

2. Integrating the BNPL With PoS System: The decision to avail the Buy Now Pay Later (BNPL) loan is taken by the consumer at the point of sale. Hence, from a systems point of view, the cashier of the retail company must have an option to allow the user to avail the Buy Now Pay Later (BNPL) loan when the sale is being made.

   Hence, retailers need to modify their point of sale system so that if users choose to avail the loan, the transaction can be processed accordingly.

3. Advertising the BNPL Services: Once the retailer has tied up with the Buy Now Pay Later (BNPL) service provider and the system is ready to process transactions, it is important for the retailer to advertise this service. It is important that customers are aware of the fact that such a service is being provided.

   It is a known fact that customers tend to increase the ticket size of their purchase if they can avail a Buy Now Pay Later (BNPL) loan. This is because many consumers view the Buy Now Pay Later (BNPL) loans as an interest free loan. Advertising these services tends to increase the volume of sales which take place in the store.

4. Credit Checks: Once the customer decides to avail the Buy Now Pay Later (BNPL) loan, the cashier at the point-of-sale system runs a quick soft credit check. This credit check is very basic and does not generally impact the credit score of the borrower. Also, the check happens almost instantaneously. Hence, it is convenient for the borrower as well.

5. BNPL Provider Pays the Retailer: Once the credit check has been run and the Buy Now Pay Later (BNPL) loan has been sanctioned, the BNPL service provider pays the entire sale amount to the retailer in one lumpsum. Some amount is deducted as processing fees. This processing fees tends to be as high as 6% to 8% in case of Buy Now Pay Later (BNPL) loans. This is because the processing fee itself includes the interest component.

   It is common for retailers to mark up their prices by 6% to 8% in order to offset the increased fee. Hence, it can be said that the interest is actually being paid by the buyers in the form of an increased price. Beyond this point the Buy Now Pay Later (BNPL) transaction happens between the borrower and the lender.

   The retailer tends to exit the equation at this point. The Buy Now Pay Later (BNPL) lender has no recourse to the retailer regardless of whether they are able to recover their money from the borrower or not.

6. Customer Pays the BNPL Provider in Instalments: The last step of the process is when customers pay the Buy Now Pay Later (BNPL) company back in instalments. If there are any missed or delayed payments, the lender tends to charge a very high interest rate. In many cases, the interest rate is charged on the entire amount and not only on the outstanding amount.

Hence, it can be said that from the retailer’s point of view, Buy Now Pay Later (BNPL) loans are a fairly simple and risk free way in which they can increase their sales.