Credit cards appear to be taking the world by storm over the last decade. According to the Transunion study, credit card accounts experienced 60 percent growth between 2020 and 2021, and millions more signed to get one.
But what happens to those who do not have a credit card or would prefer not to utilize one? That’s where buy now and pay later (BNPL) is available.
BNPL is a type of financing with a short-term duration where customers can buy an item right now and then pay it off. There is usually no additional cost for the buyer. Instead, the retailer that offers BNPL as an option for payment usually pays a fee to the BNPL service provider.
BNPL is growing in popularity due to its ease of use and the ease of use it gives shoppers. Let’s dive a little into the details of what BNPL is, how it operates, and the main actors responsible for our customers today.
What exactly is Buy Now and Pay in the Future (BNPL)?
A pay now, buy later plan gives customers an installment loan upon checkout so that they can purchase items with credit and without having a credit card. The most popular BNPL choices include Shop Pay Installments by Shopify, Afterpay, Affirm, and Sezzle.
Many companies first conduct an informal credit check on the customer before allowing the funds to be used for installment loans. Customers can choose different ways of settlement of the loan, according to the amount they borrowed and the business employed.
Certain BNPL firms are charged fees when a customer makes a late payment or default fee. Some payment methods charge interest, whereas others don’t. Certain providers might reduce the interest they charge to the consumer by charging the fees they charge merchants.
Is BNPL working?
It is believed that consumers and retailers drive the BNPL process. This is how it operates:
When a customer purchases an item, it is added to their cart and begins an order process. If you’re a customer, you’ll initiate the BNPL process like any other transaction made via e-commerce. You’ll browse your most popular online stores, select the merchandise you want to purchase, and then prepare to pay.
Its BNPL partner allows customers to purchase today with the opportunity to pay in installments. When you pay for your purchase, you can pay via BNPL and other payment options like credit or debit cards.
A soft credit check is conducted on the client. If the customer decides to purchase their goods through BNPL, the customer must provide personal information that the bank needs (such as an address or Social Security numbers). The BNPL lender then conducts a credit report on the client to verify they are in credit standing to pay back the loan by their credit history.
The BNPL service will deduct fees. The BNPL vendor now bills the retailer, claiming an amount of the transaction as an amount. The price, which usually ranges between 2% and percent, is subtracted from the amount the BNPL vendor pays the retailer. It is similar to agreements that credit card companies have with merchants.
The customer is required to pay off the loan in time. Many BNPL businesses offer interest-free payments to those who settle their entire balance within the shortest time frame (typically 30 days after using BNPL). Lenders offer different payment plans with varying rates of interest if a customer requires more periods to repay their balance. In essence, the sooner the customer can their balance and th, the cost of interest they have to pay.
The benefits of using BNPL for customers
The consumer can reap many advantages by using a BNPL service, for example:
Has no impact on credit score
Most BNPL firms conduct Soft credit tests on customers to confirm their ability to get a loan. Soft credit checks don’t affect your credit score like an actual credit check, and you’ll be in the good graces of prospective lenders. However, remember that if you’re in default in paying the BNPL vendor, it’ll be recorded with credit agencies similarly to when you’re in default on credit card transactions.
Flexible payment methods
As a customer, you’ll have various payment options available at checkout when you use the BNPL service. In general, you can choose between paying for the entire purchase cost with the BNPL service or paying the whole investment in BNPL as well as a different way of payment (such as debit cards).
Reduction in dependence on credit card
A BNPL service can provide many of the same benefits similar to credit cards. However, it is only for purchases of a small amount. Certain BNPL firms also offer an online card number identical to the credit card. This card number is to pay for purchases at your preferred online retailers. The BNPL vendor’s official site or mobile app will permit customers to apply for a virtual credit card number with enough money to pay for their purchase.
Best BNPL services
Retailers see buy now, pay later, and other services as crucial due to their ability to enhance customer satisfaction. In light of this, retailers prefer BNPL, and in demand, several BNPL companies have emerged recently. Here are six highly-rated choices:
Shop Pay Installments
It is ideal for businesses that are participants in a Shopify ecosystem. Shop Pay Installments lets customers pay their balance over four interest-free installments. The BNPL service gives small businesses similar BNPL benefits the major brands enjoy, like lesser cart abandonment and higher average value for orders. As a Shop Pay user, you can assist customers in spreading the cost of larger purchases and still receive the total amount at the time of sale.
Established in Australia, Afterpay is one of the world’s largest and known BNLP service providers. Afterpay has partnerships with more than 100,000 retail stores, which means it has a more significant presence than other listed BNLP companies. One of the unique features that is unique to Afterpay is its clever credit limiter. The technology puts an amount limit on shoppers by their credit scores. Its purpose is to stop consumers from spending more than they can repay. Afterpay will also help customers stay on track with periodic reminders to pay their bills. It even has a virtual card service that works as a credit card. However, there are penalties for late payments customers should be aware of when they cannot pay their installments on time.