‘Buy now, pay later’ is becoming common at large retailers worldwide. More and more small-business owners are allowing their customers the ability to pay in instalments, too.
In fact, surveys show that over half of the world’s businesses currently use ‘buy now, pay later’ online and only a marginal number of retailers offer it as an in-store payment option.
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 business owner and the ‘buy now, pay later provider’. When a customer makes a purchase, the provider pays the retailer in full, minus fees. Then the customer pays the provider back in instalments.
‘Buy now, pay later’ transactions cost business owners anywhere from 1.5 per cent to 7 per cent of a customer's total purchase amount, compared to 1 per cent to 3 per cent for most debit and credit cards.
For example, say your customer splits a Dh400 purchase into four payments of Dh100 each. If your ‘buy now, pay later’ provider charges a 5 per cent fee for this service, it would pay you Dh380 upfront for this transaction and collect the Dh400 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.
According to a survey by data platform PYMNTS.com, a higher percentage of millennial 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 (small-scale, non-industrial, home-made), if you're a high-margin business, (serving younger customers) offers you the opportunity to have a longer-term value for that customer,'' said Julian Alcazar, a US-based payments specialist.
‘Buy now, pay later’ may also lead to more customers increasing their spending. That's been the case for international sustainable clothing online marketplace Wearwell. Wearwell began accepting ‘buy now, pay later payments’ after receiving a small business loan in 2021.
“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,” according to the company's co-founder and CEO, Erin Houston.
‘Buy now, pay later’ isn't just for retailers. Alcazar has seen a dentist and a mechanic accept instalment payments in recent years.
“When emergencies happen, they don't happen on the day you are paid your salary,” said Alcazar. ‘Buy now, pay later’ can allow customers to get the service they need right away, which means the business owner can perform the service – and get paid for it – sooner.
What to watch out for
In December, a number of credit bureaus launched a probe of five global ‘buy now, pay later’ providers. They 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, retail experts opined. 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,” said Terri Bradford, another US-based payments specialist.
How to choose a provider
As a business owner, when shopping for a ‘buy now, pay later’ provider, Bradford added that “it's not like there's a one-size-fits-all.”
‘Buy now, pay later’ apps won't be your only options – global banks offer at-checkout financing, too. In addition to helping businesses offer at-checkout financing with payment terms of a few months, these banks have 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,” the experts added.
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 business owner 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 added, “because those are your customers.”
