Merchants dealing with the huge number of payment options currently available might have thought that they were staying on top of things by offering their customers payment by cards, digital wallets and bank transfers. However, any merchant wishing to keep up with the competition now has to consider offering the buy now pay later option.
Buy now pay later (BNPL) isn’t necessarily a new idea, as anyone who has ever had a store card or purchased from a catalogue will be able to explain, but the new twist is the ease with which BNPL can now be accessed. Companies such as Klarna, Clearpay and Laybuy now operate a service via which shoppers are offered two payment deferment options at checkout. These involve spreading the costs of the purchase over a set period of time or delaying payment in full for a specified time period. If you’re buying an outfit for £100, for example, you might be offered the chance to spread the cost over three monthly payments, or to take the outfit now but pay nothing until two months later.
The popularity of BNPL schemes is hard to deny. They are currently the fastest growing online payment method and are expected to account for as much as 10% of UK online spending by 2024. Although BNPL schemes don’t reduce the cost of the item being purchased, they can be extremely helpful when handling cash flow. At the time of writing, Klarna has approximately eight million UK customers and works with 6,500 retailers, while Laybuy works with more than 800 retailers. In many cases, specific retailers sign an exclusivity deal with certain BNPL providers, meaning that any customer who wants to access BNPL from a range of different merchants will generally have to end up signing up with multiple BNPL providers.
Besides the ease and convenience of BNPL, other factors powering its growth as a payment option include the following:
The vast majority of BNPL schemes operate on an interest-free basis, and companies like Klarna and Clearpay don’t charge fees for using their products. Klarna goes one stage further by insisting that they never even charge late payment fees. In effect, BNPL is offering a short term loan and as long as the payment plan is adhered to – it’s a loan that customers can access without having to pay any charges. This fact alone makes the appeal of BNPL above credit cards or other loan products easy to understand.
For merchants, the advantage of offering a BNPL option is that it encourages people to make purchases which they might otherwise hold back from doing, as long as they know that they’ll have the money to cover the cost over the specified period. In return for this, the BNPL provider will take a cut of any money a retailer takes via the scheme. When the £100 outfit mentioned previously is purchased, for example, the BNPL provider will pay for the purchase directly to the merchant, minus their percentage, and it will then be the responsibility of the BNPL company to recoup the money from the customer.
Another aspect of the BNPL option, which has doubtlessly fuelled its popularity, is the short term nature of the loan. The customer won’t be left feeling that they have a debt hanging around their neck for a long period, since the vast majority of BNPL loans are cleared within a matter of weeks.
Depending upon which provider they use the customer will agree to terms and conditions stating how the money will be repaid. Another simplification of the process involves the payments being automatically deducted from a nominated card or account, so there’s no risk to the customer of forgetting to make regular payments.
The terms vary slightly from company to company:
- Klarna – payments will be made in three instalments; an initial payment will be made on purchase, then after 30 days, with the final instalment due after 60 days
- Clearpay – payments will be made in 4 instalments; an initial payment at purchase, then every two weeks, with the final instalment due after six weeks
- Laybuy – payments will be made in six instalments; an initial payment at purchase, then one per week, with the final instalment due after five weeks
- PayPal-Pay In 3 – payments will be made in three instalments; an initial payment at purchase, then once per month, with the final instalment due after two months
Soft credit check
Another popular aspect of BNPL schemes is the ‘soft’ nature of the credit check involved. Many forms of borrowing feature a ‘hard’ credit check, which is to say one that will leave a trace on the customer’s credit history, and have a negative impact if the credit is refused. A BNPL loan, on the other hand, involves only a ‘soft’ check, which leaves no trace and is much less rigorous.
The amount available to borrow for BNPL will vary from user to user, and can be increased as payments are made on time. For most new customers the initial credit limit will be in the hundreds, although this is counterbalanced by the fact that customers can borrow from multiple BNPL providers without each being aware of how much they have borrowed elsewhere.
Opting for BNPL makes it much simpler for customers to return items that they are not happy with. If a customer makes a purchase using Klarna, for example, and chooses the ‘pay in full in 30 days’, they can return the item before any money has left their bank account. Even using the option of making an initial payment greatly reduces the amount of money leaving the account initially, and the frustration of waiting for a refund to clear on to a payment card.
Although these are the terms and conditions which apply to BNPL providers at the time of writing, the chances are that things are going to change in the future.
In February of this year, the UK government announced that BNPL products would be regulated by the Financial Conduct Authority (FCA) in the future. Although the details of this regulation, and when it will be introduced, are not yet clear, it is likely that any FCA oversight (which currently does not apply to BNPL products) will tighten up the availability of BNPL. However, for the time being, and over the short to medium term, merchants who want to attract as many customers as possible, and persuade the maximum number to make a purchase, will need to take a look at offering BNPL.
NOIRE Keeps It Simple
As the payment landscape evolves, the successful merchants will be those who manage to stay on top of the latest trends and customer demands. Working with NOIRE means working with a partner that is constantly ahead of the curve, one that handles the latest technology and new ways of paying so that you can concentrate on running your business. If you’d like to know more about how our commitment to simplicity, security and flexibility could help your business now and in the future please get in touch now.