Buy Now, Pay Later: Balancing the Benefits and Drawbacks for Small Businesses
Buy now, pay later (BNPL) platforms are gaining popularity as a payment method for consumers both online and in person, with over a third of U.S. adults (39%) having used these services at least once. BNPL offers an alternative way to pay for goods and services over time, interest-free for payments made on time. As retail businesses experience an increase in consumer spending, many Main Street businesses are considering adding this payment option at point-of-sale checkouts. Small businesses need to evaluate the advantages and anticipate potential disadvantages to ensure a positive shopping experience and attract new customers.
What is Buy Now, Pay Later
Buy Now, Pay Later (BNPL), is a short-term, interest-free credit option for purchases. Platforms such as Affirm, Klarna, and Afterpay enable consumers to repay purchase amounts in installments over a short period of time. Consumers benefit from an interest-free payment plan as long as payments are made on time.
Typically, purchases made using BNPL services involve a small initial payment, approximately 25% of the total cost, followed by equal installments over a few weeks or months. Payments are often automatically deducted from a debit card, bank account, or credit card, offering a straightforward and predictable payment structure. While costumers pay over time, businesses receive full payment upfront from the platform, minus fees.
BNPL Pros and Cons for Small Businesses
For businesses that incorporate Buy Now, Pay Later technology at check out, there are several benefits. Offering a wide range of payment options can help attract and retain customers, ultimately fueling business growth. Although BNPL services charge businesses a fee, they provide full upfront payments to businesses, ensuring steady and predictable cash flow to enhance business performance. A report from Stripe indicates that businesses offering BNPL services saw a 14% increase in revenue. Many providers also claim that reaching more customers through diverse payment options helps to boost average order value (AOV) and conversion rates. With more than 26% of millennials and nearly 11% of Gen Z shoppers looking for alternative payment options, BNPL allows businesses to tap into new customer bases.
While the potential to increase sales and attract new customers is promising business owners must consider the drawbacks of including BNPL in their payment options. BNPL providers charge merchants fees ranging from 1.5% to 7% of a customer's total purchase amount, which can be significantly higher than the 1% to 3% typically charged for debit and credit card transactions. For small businesses operating on tight margins, these fees can impact overall profitability and working capital. Additionally, negative customer experiences with BNPL providers can inadvertently affect the business's reputation, leading to dissatisfaction and potential harm to the brand's image.
Deciding whether BNPL is suitable for a business depends on specific circumstances and business models. Assessing the impact of BNPL on working capital and overall business valuation is important before integration. For some businesses, BNPL can drive growth and customer acquisition, while for others, the associated risks may outweigh the benefits. Conducting a thorough evaluation is essential to ensure alignment with business goals and to make an informed decision.