Buy Now, Pay Later Has Emerged as One of the Most Popular Payment Methods

Buy Now, Pay Later payment flow illustration

Buy now, pay later services—such as Affirm, Afterpay, Klarna, and Zip—are used by a wide variety of businesses, especially ecommerce retailers, to increase conversion, increase average order value, and reach new customers. On buy now, pay later eligible sessions, businesses on Stripe have seen up to 14% increase in revenue. These payment methods offer customers the ability to immediately finance purchases and pay them back in fixed installments over time.

You, as the merchant, receive the full payment of the item up front, minus any fees (just like a credit card payment), and don't have to manage the financing. The buy now, pay later providers take on the task of underwriting customers, managing the installments, and collecting payments, so you can focus on growing your businesses.

Buy now, pay later services are typically presented as an option in the payment flow, alongside credit cards and other payment methods. When customers make a one-time purchase, they simply select a buy now, pay later provider in the payment form, and are redirected to the provider's site or app to create an account or log in. Customers choose whether to accept the terms of the repayment plan—typically selecting bi-weekly or monthly installments—and complete the purchase.

Once the purchase is complete, businesses receive the full payment up front (minus any fees). Customers pay their installments directly to the buy now, pay later provider, often with no interest and no additional fees when they pay on time.

As long as customers are careful not to overspend and continue to make payments on time, most buy now, pay later payment methods shouldn't significantly impact a customer's credit score.

However, credit scores may be impacted if providers run a hard credit check or if a customer fails to make payments on time.

Buy now, pay later services generate revenue by charging fees to both customers and businesses. Business fees will depend on the provider, but will normally include a fee for the initial setup process and a fixed fee for each transaction. Customer fees are generally related to interest charges or late fees for missing payments.

Business model and revenue sources for BNPL services

Frictionless checkout experiences are vital for any business, especially if you are focused on ecommerce growth. Customers expect streamlined, customizable payment experiences—ones that give them the flexibility to choose how to make a purchase. Not only do buy now, pay later payment methods offer this flexibility and convenience to your customers, they also reduce fraud and increase conversion and average order value.

By offering buy now, pay later options, you can:

• Get paid up front and receive protection from repayment risk and fraud You receive the total transaction amount up front, immediately—whether or not the customer successfully pays their installments. This means that buy now, pay later providers take on all the customer risk, shielding your business from fraud. If a customer does file a fraud-related dispute, the buy now, pay later provider takes on the risk and any associated costs.
• Reach more customers Offering a variety of payment methods allows you to create a relevant and familiar payment experience, helping attract more customers. Buy now, pay later options are particularly popular among younger customers who often don't have a credit card: more than 26% of millennials and almost 11% of Generation Z shoppers used buy now, pay later services to pay for their most recent online purchases. Buy now, pay later services also have established marketing channels, such as their shop directory and email marketing, which may provide additional opportunities for you to reach new customers.
• Offer a better customer experience Buy now, pay later payment services offer customers a faster, more convenient way to access financing. Customers are only subject to a soft credit check (versus a hard check for other financing methods). There are no separate applications, application fees, or additional processing time, and most providers have simple-to-understand repayment plans and terms. Returning customers can also check out with ease, completing the payment flow in just a few clicks.
• Increase conversion Customers are more likely to make a purchase, especially a large one, if they can pay for the item over time. Buy now, pay later services help reduce the sticker shock—it's less intimidating to make four, interest-free payments of $50 than one $200 transaction with a credit card with interest continually accruing.
• Boost your average order value Buy now, pay later services remove the barrier to larger purchases, allowing customers to break up the payment over time to fit within their budget. For businesses that sell lower priced goods, customers may be more likely to purchase additional items once they learn they can pay the total amount over time.