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“Buy now, pay later” is becoming common at large retailers like Target, Ikea and Macy’s. More and more small-business owners are allowing their customers the ability to pay in installments, too.
In fact, 55% of local businesses use buy now, pay later online and 5% offer it as an in-store payment option, according to a February survey from payments news site PYMNTS.com.
If you're thinking about offering buy now, pay later at your small business, here’s what you need to know.
How buy now, pay later works
Buy now, pay later involves three parties: the customer, the merchant and the buy now, pay later provider. When a customer makes a purchase, the provider pays the merchant in full, minus fees. Then the customer pays the provider back in installments.
Buy now, pay later transactions cost merchants anywhere from 1.5% to 7% of a customer’s total purchase amount, compared to 1% to 3% for most debit and credit cards, according to a 2021 briefing from the Federal Reserve Bank of Kansas City.
For example, say your customer splits a $400 purchase into four payments of $100 each. If your buy now, pay later provider charges a 5% fee for this service, it would pay you $380 upfront for this transaction and collect the $400 from the customer over time.
Why businesses offer buy now, pay later
Buy now, pay later may cost more than other payment methods, but advocates for the service say it brings additional benefits.
“We usually ask our retail clients not to think of us as a payment option, but as a new customer acquisition channel,” says David Sykes, head of Klarna North America.
According to the PYMNTS.com survey, a higher percentage of millennial and Generation Z customers are interested in using buy now, pay later compared to respondents of other generations, particularly at luxury and specialty stores.
“If you’re a boutique, if you’re artisanal, if you’re a high-margin business, [serving younger customers] offers you the opportunity to have a longer-term value for that customer,” says Julian Alcazar, a Federal Reserve Bank of Kansas City payments specialist.
Buy now, pay later may also lead to more customers increasing their spending. That’s been the case for online sustainable clothing marketplace Wearwell.
Wearwell began accepting buy now, pay later payments after receiving a Small Business Impact Initiative grant from Klarna in 2021. Today, customers who use Klarna spend about 76% more than those who don’t, according to the company’s co-founder and CEO, Erin Houston.
“It just reduces the friction when it comes to someone adding one more thing to their cart, or choosing to splurge on that purchase that they really want,” Houston says.
Buy now, pay later isn’t just for retailers. Alcazar has seen a dentist and a mechanic accept installment payments in recent years.
“When emergencies happen, they don’t happen on payday,” Alcazar says. Buy now, pay later can allow customers to get the service they need right away, which means the merchant can perform the service — and get paid for it — sooner.
What to watch out for
In December, the Consumer Financial Protection Bureau launched a probe of five buy now, pay later providers, including Klarna. Officials cited concerns about how much debt customers are accumulating, how these companies use customer data and whether they adequately disclose their fees and dispute resolution processes.
Buy now, pay later providers will have to adapt to potential regulations, says Brett Worick, vice president of BNPL and point of sale lending at First National Bank of Omaha. And as this payment method gets more popular, he says buy now, pay later providers will need to learn to manage the risks of these kinds of loans, which may mean their offerings will change.
“It's almost like the risk is the stuff that we don't even know about yet,” says Terri Bradford, a senior payments specialist at the Federal Reserve Bank of Kansas City.
How to choose a provider
When shopping for a buy now, pay later provider, Bradford says “it’s not like there’s a one-size-fits-all.”
Buy now, pay later apps won’t be your only options — banks offer at-checkout financing, too. For example, First National Bank of Omaha rolled out its own buy now, pay later service last fall.
In addition to helping businesses offer at-checkout financing with payment terms of a few months, FNBO has point-of-sale loans with terms as long as 10 years.
“It's really just a new way to lend money to customers in the more digital, instantaneous age,” FNBO’s Worick says.
Look for a buy now, pay later provider that integrates with your point-of-sale system. If you have a brick-and-mortar location, note that some providers are now available in stores as well as online.
It’s also important to choose a provider that you trust to represent your business, because shoppers don’t always distinguish between a merchant and the third party they’re using for payments.
“Do the due diligence to figure out who that partner is, what their terms are, what they do for the consumer,” Bradford says, “because those are your customers.”