Buy now pay later companies have been around for a while. They’ve been quietly building a following. Some have even gotten the attention of and been bought by a couple of the bigger players in the payments industry. But BNPL truly made news when Walmart decided to end their layaway program and switch to BNPL. Target soon followed, as did many other big retailers. Then Apple got into the game. As a small business, should you offer BNPL too?
In this article, we go over some of the bigger BNPL players, summarize how they charge, and give a suggestion.
Let’s start with how BNPL generally works.
- How BNPL Works for Consumers
- How BNPL Works for Merchants
- Affirm is One of the First Fintech BNPL Companies
- Klarna is a European Based BNPL Provider
- Afterpay is a BNPL Company Owned by Block
- PayPal Pay Later is Integrated with Other PayPal Services
- Apple Pay Later is the Newest Big-Name Entrant to the BNPL Space
- Should Small Businesses Sign Up for BNPL?
How BNPL Works for Consumers
Buy now pay later companies basically offer short-term loans directly to consumers. Consumers can apply for the loan from the BNPL company’s website, at checkout, or through an app. With online stores, often, you’ll see a BNPL option on the checkout page. Picking the option will start the case-by-case credit application process.
Some BNPL companies will issue you a debit card. This way, you can buy from physical stores in their network or stores that don’t have an BNPL option.
The BNPL Company Will Check Your Credit First
If you’ve never applied for a loan through the BNPL company you’re using, then the company will first do a “soft” credit pull on you. This soft pull gives them some idea of your credit score, but it won’t affect your score like a hard credit pull would.
Assuming your credit looks good, the BNPL company will offer you either a short term loan payable in four installments or a long term loan payable over a longer period of time. Typically, the four-installments loan is a no-interest loan. The long term loan usually includes interest payment. As well, many buy now pay later companies will do a “hard” credit pull on you before clearing you for the long term loan.
The loan amount also depends on your personal credit. The BNPL company might approve a large loan to someone with excellent credit. The person can then make several purchases, be in the middle of paying off the loans, and still get a new loan from the BNPL company. But, for someone with less stellar credit, the BNPL company might only approve them one loan at a time, and for smaller amounts.
Once You’re Approved, You Pay the BNPL Company Back Over Time
Once the BNPL company approves you for the loan, you must pay the first installment at checkout. Then, the BNPL company pays the rest to the merchant, and you can take your goods or services right away. For the later installment payments, the BNPL will remind you to pay at the appropriate time. Usually, the installments are every two weeks.
Note that, as you build a lending history with the BNPL company, they will have information on your buying and repayment habits. Based on your good or bad repayment history, the BNPL company can increase or decrease your credit line.
How BNPL Works for Merchants
From the business side, BNPL is fairly easy to sign up. The process is similar to signing up for payment card processing. With some buy now pay later companies, the process seems closer to signing up for low risk merchant account or even a high risk merchant account.
How Merchants Can Take BNPL Payments
Once the BNPL company approves your application, you can integrate a BNPL button of the company on your checkout page. Integration is usually easy. Most of the big BNPL companies have already integrated their technology with the big online store platforms like Shopify, WooCommerce, BigCommerce, and Wix. They’re also often integrated with big payment processors like Stripe and Adyen.
Is BNPL Free for Merchants to Use?
Some buy now pay later companies are free for you to use. That is, you pay nothing on top of a credit card processing fee when a customer uses BNPL to pay. The BNPL company pays you as soon as the customer pays the initial payment to the BNPL company. Then, you can release the goods or services to the customer.
With other buy now pay later companies, you have to pay the BNPL company a fee every time a customer uses BNPL to buy from you. Depending on how you link to the BNPL company, you may have to pay an extra payment processing fee or payment gateway fee as well. The fee is evaluated on a case-by-case basis, but can be as high as 6% + $0.30 per transaction or even higher.
Once the loan is finalized (the BNPL company often use the term settled), the BNPL company pays you the full amount right away. If the BNPL company charges you a transaction fee, they take the fee out before they send you the rest of the money.
What Happens if a Customer Defaults on the Loan or Returns the Item?
If the customer defaults on the loan, this is between the customer and the BNPL company. You get to keep the money. If the customer commits fraud to get the loan, that’s also between the customer and the BNPL company.
But if the customer returns the item, there’s a process to refund the purchase price. Often, you have to refund the full price, but you don’t get the transaction fee back from the BNPL company. If there’s a dispute for, e.g., you sending them an allegedly broken item, the BNPL companies all have dispute procedures to determine who gets to keep the money.
What are Some Buy Now Pay Later Companies?
Next, we’ll take a look at some of the more well-known BNPL companies. We’ll summarize how much they charge a merchant for offering this payment option to their customers as well as give other details on doing business with them.
Affirm is One of the First Fintech BNPL Companies
Affirm is a US based BNPL company. It started in 2012, and was founded by one of the PayPal founders, Max Levchin. When Walmart started to offer BNPL to its customers, they picked Affirm to work with.
How Affirm Works With Consumers
Affirm’s BNPL program offers consumers an interest free option and an interest bearing option. The interest free option is paid in four installments two weeks apart. If a consumer wishes to have a longer repayment period, they can opt for the interest bearing loan. The typical amount borrowed is between $50-$17,500. There are no late fees if you miss an installment payment.
Affirm offers its users a one-time-use virtual debit card to use at any store, even if the store isn’t a participating business. The card is a Visa card, so non-participating stores will just be charged a regular Visa processing fee.
How Affirm Works With Businesses
For businesses that wish to sign up with Affirm, there are some requirements you have to meet. Affirm won’t take most high risk businesses. You’ll also have to sell to US consumers, have a US bank account, and be a US entity (e.g. an UK business with a US subsidiary). Affirm does business in Canada under the name BrightPay. You won’t need to be a Canadian entity or have a Canadian bank account. You just need to have a Canadian store that sells in CAD.
Affirm integrates with most of the big payment platforms like Shopify and WooCommerce. It also integrates with many payment processors. Once the consumer loan settles, you’re paid within 1-3 business days.
For each transaction through Affirm, you pay a transaction fee. The fee varies for each business and depends on things like industry, type of business, annual sales, and your business’s credit rating. A typical rate is 5.99% + $0.30 per transaction.
If a customer fails to repay the loan, that’s between Affirm and the customer. You keep your money. However, if the customer wants to return the item, you can do a full or a partial refund. You won’t get the processing fee back from Affirm for refunds. And if the customer files a dispute against you, you have to follow Affirm’s procedure to settle the dispute. There doesn’t seem to be an extra charge by Affirm for working on the dispute, unlike the charge for credit card chargebacks.
There isn’t a lot of information for merchants on Affirm’s website. But, here’s the FAQ page that does provide helpful information.
Klarna is a European Based BNPL Provider
Klarna is a Swedish BNPL provider. It’s been around for quite a while—since 2005.
How Klarna Works with Consumers
Like most BNPL companies, Klarna offers a short term, pay-in-four, and interest free loan. It also offers a longer term but interest bearing loan. Unlike other BNPL companies, Klarna offers its customers a Pay in 30 Days option. With this option, a merchant will send you the goods and you have 30 days to pay in full or you can return the entire shipment.
Klarna doesn’t have a minimum or maximum loan amount. They decide how much you can borrow every time you select Klarna as a payment option.
Klarna offers its US shoppers a Klarna Card. This is a Visa card with a spending limit that’s decided as you make each purchase. You use the Klarna card like any payment card, even if the merchant is not in Klarna’s network. Then, you can repay the purchase in 4 payments, like a regular Klarna pay-in-4 purchase. The card has no interest and is free for the first year. After that, you pay $3.99/month to keep the card active.
How Klarna Works with Merchants
Klarna Offers Different Services to Merchants of Different Size
Klarna divides its merchants to those who have annual sales of $3M or above or $3M or below. Only merchants who sell $3M or more can sign up for the Pay in 30 Days feature or participate in various advertising opportunities to Klarna’s existing users.
How to Sign Up with Klarna
For most businesses, signing up with Klarna is a simple process. It can be done through their website. If you’re a high risk business, Klarna might not want to work with you. However, this is decided on a case-by-case basis, so, if in doubt, ask to be sure.
To work with Klarna, you have to sign a contract with them. The initial contract term is 1 year. If you want to cancel after the first year, you have to tell them 1 month in advance. Otherwise, the contract automatically renews. It’s not clear if the contract renews for another year or from month to month.
After you’re approved as a Klarna merchant, you can integrate the Klarna button on your website in several ways. Klarna is already integrated with all the big shopping platforms like Shopify and WooCommerce. You can also easily integrate Klarna through payment processors like Stripe and Adyen.
Klarna Transaction Fees
It’s been very difficult to find out how much Klarna charges its merchants for each transaction. Some articles say up to 5.99% + $0.30 per transaction, but they don’t cite any sources. One of the big shopping platforms, BigCommerce, says Klarna decides the transaction fee on a case-by-case basis. Another big processor that works with Klarna, Adyen, lists Klarna’s US fee to be 4.29% + $0.30. Our best guess is that Klarna starts with 4.29% + $0.30 and adjusts up or down from there.
If a customer files a dispute against you, Klarna has a dispute process you’ll have to follow. If you lose the dispute, US businesses pay an $8 fee. You can issue refunds for purchases made through Klarna. We can’t find information on whether Klarna will refund you the transaction fee. If they follow common industry practice, then they will not.
If you’re not a merchant in Klarna’s network, a Klarna user can use their Klarna Card to pay for a purchase, like any regular purchase. The Klarna card is a Visa card, so, presumably, you’ll be charged your regular Visa processing fee. Logically, any returns or disputes will be handled like any payment card return or dispute through your payment processor.
Afterpay is a BNPL Company Owned by Block
Afterpay is owned by Block (Square’s parent company). It’s called Clearpay in the EU and UK.
How Afterpay Works With Consumers
Like most buy now pay later companies, Afterpay offers a pay-in-4 short term loan with no interest attached. They also offer a longer term, interest bearing loan. If you miss a payment, then Afterpay will freeze your account for new purchases until you catch up on your repayment. There’s a late fee of up to 25%.
Afterpay offers its users an Afterpay Card. This is a virtual card that is activated from the Afterpay app before each use. The card is stored in Apple Pay or Google Pay. So, after activation from the Afterpay app, you tap your smartphone and pay like any payment card stored in Apple Pay or Google Pay. You can only use the Afterpay Card with merchants who are in Afterpay’s network.
How Afterpay Works With Merchants
You have to apply to be an Afterpay merchant. They’ll typically approve low risk businesses, but they may not take high risk merchants. Approval is on a case-by-case basis.
Once you’re approved, you can integrate Afterpay through most online shopping platforms like Shopify, WooCommerce, BigCommerce, and Magento.
According to Afterpay’s Merchant Agreement, Afterpay charges a 6% + $0.30 fee for each US transaction. But according to BigCommerce, the exact fee is decided on a case by case basis. Even more confusing, Adyen lists Afterpay’s transaction fee as 4.99% + $0.30. We think it’s reasonable to assume that Afterpay charges 6% + $0.30 by default but might lower the fee on a case by case basis.
Unlike the other buy now pay later companies we looked at for this article, Afterpay sometimes requires a reserve account for its merchants. Depending on your business, this could either be a rolling reserve or a capped reserve. Afterpay reviews the reserve account every 90 days, to either change the reserve amount or take you off the requirement altogether.
If you refund a purchase to a customer, Afterpay will not return to you the transaction fee for the original payment. If your customer files a dispute against you and you lose the dispute, Afterpay might charge you a chargeback fee.
It’s extremely difficult to find information about how Afterpay works with merchants without actually signing up as an Afterpay merchant. We found most of our information either in an extremely difficult to understand Afterpay Merchant Agreement or Afterpay’s Merchant Help page.
PayPal Pay Later is Integrated with Other PayPal Services
PayPal has been making consumer loans for quite some time. So, it’s not surprising that it’s also entered the BNPL market.
How PayPal’s BNPL Works with Consumers
PayPal’s buy now pay later option offers the same pay-in-4 service like other BNPL companies. This is an interest free loan. If you’re late on an installment, they won’t charge you a late fee. But they will probably also suspend your account until you catch up in payments.
You can borrow from $30-$1,500 using PayPal’s service. If you need a larger loan, you have to go through PayPal’s other lending service called PayPal Credit.
To use PayPal’s BNPL service, you have to have a PayPal account. But, as everyone knows, that’s easy to set up. They might do a soft credit check before approving your loan. If you’ve had a PayPal account for a while and are a regular user, we suspect that PayPal will already have enough information on your credit history to make a decision without even a soft credit check.
How PayPal Pay Later Works for Merchants
To offer PayPal Pay Later to your customers, you’ll first have to have a PayPal business account. It can be set up fairly quickly.
The PayPal BNPL service is integrated into PayPal Checkout. PayPal Checkout is a suite of payment options all integrated together. A subgroup of payments called PayPal Payments is included in PayPal Checkout, and that’s where you’ll find payment options like PayPal Pay Later, PayPal Credit, Venmo, pay with PayPal, and similar.
You can add the coding for the PayPal Checkout button to your online store’s payments page yourself or hire a developer to do it (PayPal seems to be able to connect you with one). PayPal Checkout is also already integrated with online shopping platforms like WooCommerce, Magento, and BigCommerce.
You don’t have to pay an additional fee to use PayPal Pay Later. Instead, it’s charged like any payment service under PayPal Payments, which costs 3.49% + $0.49 per transaction.
Any returns and disputes are handled like any other PayPal payment service. If you process a return, you won’t get back the transaction fee for the original transaction.
You can find PayPal Pay Later information here and PayPal Checkout information here.
Apple Pay Later is the Newest Big-Name Entrant to the BNPL Space
Apple Pay Later is integrated into Apple Pay and will be a part of the iOS 16 release. As we write this article, there’s not a lot of merchant-focused information about Apple Pay Later. We’ll update this article when Apple provides more merchant-focused information on its BNPL service.
How Apple Pay Later Works for Consumers
From the consumer’s side, Apple’s BNPL service works like most BNPL services. You get to pay for a purchase in 4 interest free installments, and you must pay the first installment at the time of purchase.
According to some news sources, the loan will be capped at around $1,000. If you miss a payment, then you won’t be able to purchase more until you catch up. There is no information on how, or even if, Apple plans to offer loans of a higher amount. Apple is reportedly financing this venture entirely on its own, using a wholly owned subsidiary.
How Apple Pay Later Works for Merchants
Apple Pay Later uses the Mastercard network, so the payment just shows up as a regular Mastercard charge. Merchants do not have to pay extra or even do anything to take Apple Pay Later payments. It’s all up to the customer to pick their choice of payment.
Because Apple Pay Later uses the Mastercard network, we’re assuming that refunds work like any Mastercard refund. However, this is just a guess.
Here’s the only information on Apple Pay Later for merchants that we’ve been able to find from Apple.
Should Small Businesses Sign Up for BNPL?
Let’s cut to the chase. We don’t think small businesses need to sign up with BNPL providers. More and more consumers might start to use BNPL, but it should be the buy now pay later companies—not merchants—who work to make BNPL more widely accepted by merchants.
Of all the BNPL companies we profiled here, only Apple and PayPal do not charge a merchant extra to use their service. With Apple, a BNPL payment is just like a Mastercard charge. With PayPal, BNPL costs the same as many of its other payment services like Venmo, pay with PayPal, and PayPal Credit.
But for other BNPL companies, the published transaction fee is all around 6% + $0.30. But both Affirm and Klarna give their users a Visa debit card to use to pay merchants who are not in their network. In other words, it costs less for a merchant not in Affirm’s or Klarna’s network to take a payment than a merchant in their networks. While Afterpay also gives its users a payment card, the card can only be used with merchants in Afterpay’s network. But, as competition in the BNPL sector heats up, we suspect Afterpay will try to keep its users happy and let them buy anywhere they wish.
The way we see it, the most valuable thing BNPL companies own is the data on their users’ credit history and buying habits. This information can be turned into targeted advertising campaigns where the BNPL company can charge advertisers a lot of money. And it is the merchants who are helping the BNPL companies build this valuable data. That’s why we think the buy now pay later companies should be paying merchants for this help instead of the other way around.
Questions? Comments?
