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What is BNPL and how does it work?

November 20, 2022

Buy now pay later (BNPL) gives customers more flexibility when making purchases. It offers an alternative to traditional forms of credit and has quickly established itself as a popular payment type with consumers. If you're new to BNPL, you may have questions about how it can unlock buying power for your customers. That's the purpose of this guide, which describes all there is to know about BNPL and how it works.

What is BNPL?

Buy now pay later is another form of credit that allows customers to make a purchase and spread the cost, usually over three or four payments. Different options are available: some require the balance to be paid within 30 days, while others over 12 months. 

Consumers have taken to BNPL products, with four in ten Brits already using this form of payment to make purchases. It's particularly popular with millennials and Generation Z, who often prefer BNPL over more traditional forms of credit. 

What does BNPL cost consumers?

One of the reasons why BNPL is popular relates to the fact consumers can spread the cost of products and services over interest-free instalments. Essentially, customers are only paying the purchase price of an item, and pay no fee for using the BNPL product.

However, BNPL is not limited to 0% options. Interest-bearing products exist and typically allow for longer repayment periods, meaning customers can go for a more extended period without needing to make any repayments, and/or can benefit from smaller repayment amounts. 

Does BNPL affect consumers’ credit scores?

Up till the last year or so, a lot of BNPL providers didn’t share information with credit reference agencies. So if they made late payments, it wouldn't be reported on their credit report. This has all changed since the government announced plans to tighten regulation around the industry in June 2022.

The majority of BNPL providers now rightly share this information. So, if a shopper uses BNPL and pays the amount off within the agreed time period, they're more likely to increase their credit score. Failure to make payments on time, however, can lead to a lower credit score. Therefore, it's essential to promote responsible lending among customers, letting them know what borrowing entails and their responsibility for making repayments on time. 

What happens if a customer isn’t eligible for BNPL?

Buy now pay later offers a more flexible way to borrow. Its barrier to entry isn't as high as other forms of credit, meaning more customers can benefit from finance to make purchases. Yet, some customers may not qualify for certain BNPL products. 

Lenders and brokers aim to increase approval rates but must ensure customers meet eligibility criteria. That's why it's good to work with a retail finance provider offering multi-lender features. A multi-lender product seamlessly moves an applicant onto the next lender if rejected by the first or second. This means more credit profiles are responsibly covered, boosting finance approval rates. It all happens in the background, too, meaning the user's shopping journey isn't disrupted, and they can enjoy a smooth checkout experience while still getting finance to pay for items. 

Are there alternatives to BNPL?

There are many different forms of BNPL products. Therefore, there’s likely an option available that meets your business's needs. There’s no such thing as a one-size-fits-all approach and the best retail finance providers offer flexible products that are tailored to a company's setup, products and target demographics. 

Benefits of BNPL for merchants

Merchants want to provide customers with the best experience possible. Offering alternative payment methods, such as BNPL, is one of the most efficient ways to give audiences flexible payment options. It encourages buying power for shoppers and reduces cart abandonment, all while removing friction from the purchasing process. 

Customers who see that you offer BNPL are more likely to return and shop with your online store again. Offering these types of payments shows that your business thinks about its customers, which helps build loyalty and meets their needs by offering a payment method that increases their buying confidence. 

The future of finance

Buy now pay later continues to make great strides. Merchants offering it to their customers can benefit from higher average order values and more business thanks to the flexibility it promotes. Whilst simultaneously alleviating the financial burden of paying for purchases in one go for customers. 

Discover more about BNPL and how Deko can set your store up with retail finance solutions designed to help you sell more.