buy now pay later business plan pdf

Buy now, pay later: Five business models to compete

Point-of-sale (POS) financing services in the United States have grown significantly over the past 24 months, especially since the onset of COVID-19. Trends fueling growth include digitization, rising merchant adoption, increasing repeat usage among younger consumers, and an expanding set of players targeting lending at point of sale, a service also known as “buy now, pay later.”

About the authors

Thus far, fintechs have taken the lead, to the point of diverting $8 billion to $10 billion in annual revenues away from banks, according to McKinsey’s Consumer Lending Pools data. In our view, only a few banks are responding fast enough and boldly enough to compete. Banks that underestimate the threat may see continued loss in share and could lose out on participating in a growing value pool and gaining share among younger and new-to-credit customers, as banks in Australia and China did when facing a similar situation. To avoid that outcome, US banks need to understand the landscape for POS financing and choose from among the emerging models.

This article seeks to give POS financing players as well as merchants the necessary insights to refine their strategies in the POS-financing arena. It provides an overview of the market, details key trends and factors influencing growth, and offers ideas for market entry for banks and partnerships for merchants. The insights are based on McKinsey research, including McKinsey Consumer Lending Pools (a proprietary database covering granular market size and growth trends), the McKinsey POS Financing Consumer Survey and POS Financing Merchant Survey, and our recent experience with banks and merchants.

POS financing’s expanding role in unsecured lending

Credit originated at point of sale is projected to continue its growth from 7 percent of US unsecured lending balances in 2019 to about 13 to 15 percent of balances by 2023, according to data from McKinsey’s Consumer Lending Pools (Exhibit 1). This is the only unsecured-lending asset class that has experienced high-double-digit growth through the COVID-19 crisis. The growth is underpinned by increased consumer and merchant awareness and adoption of point-of-sale financing solutions.

Our annual POS Financing Survey shows that US consumers are getting used to seeking merchant-subsidized credit at point of sale: about 60 percent of consumers say they are likely to use POS financing over the next six to 12 months. Additionally, merchants are seeing value in these solutions, as most enhance cart conversion, increase average order value, and attract new, younger consumers to the merchants’ platforms. However, the incremental impact of such solutions varies by merchant size and category.

About 60 percent of consumers say they are likely to use POS financing over the next six to 12 months.

Fintechs are capturing almost all the value being created in POS financing because banks have been slow to respond. Consequently, banks have lost about $8 billion to $10 billion in annual revenues to fintechs. Far worse for banks, they are losing access to an acquisition channel with potential to serve highly engaged younger consumers.

Adoption of POS financing isn’t limited to consumers with relatively low credit scores. Adoption across higher-credit customers is increasing as the credit mix is influenced by more premium merchants starting to offer financing at checkout. Around 65 percent of total receivables originated by point-of-sale lenders are with consumers having credit scores higher than 700. As an example, Affirm is originating upward of $1 billion in loans at the exercise equipment company Peloton annually, with the portfolio’s average credit score at about 740. In the lower-ticket “Pay in 4” model, which allows consumers to split payments into four interest-free installments (for example, Klarna, Afterpay), usage is driven by consumers with lower credit scores, but even here, the low scores result from thinner credit files, not poor credit usage.

Five distinct offerings with integration across the purchase journey

The growth in POS financing for consumers involves five distinct sets of providers and models, each with varying strategies and value propositions (Exhibit 2). 1 POS financing for small and medium-size enterprises is ripe for growth, but we do not cover the opportunity in this article. Understanding these models gives a sense of the segments they target, the merchant and consumer needs they address, and business models banks and traditional lenders are competing with.

Integrated shopping apps

The most prevalent misconception across banks and traditional players is that shopping apps offering “buy now, pay later” (BNPL) solutions are pure financing offerings. While that may be true for the smaller players, the leading Pay in 4 providers are building integrated shopping platforms that engage consumers through the entire purchase journey, from prepurchase to post-purchase.

The largest players are steadily building scale and engagement with an aspiration to become a “super app,” similar to large China-based players such as TMall or Ant Group, that offer shopping, payments, financing, and banking products in a single platform. These large providers already monetize consumer engagement through offerings other than financing (for example, affiliate marketing, cross-selling of credit cards and banking products). As long as traditional competitors fail to acknowledge this and unless they build solutions that drive engagement through the entire journey, they will find it tough to compete with these players (Exhibit 3).

The core Pay in 4 model still focuses on financing smaller-ticket purchases (typically less than $250) with installments that consumers pay down in six weeks. Providers like Klarna and Afterpay have seen exponential growth during the COVID-19 pandemic, amplified by rising merchant adoption and repeat consumer usage. Even the largest merchants that have shied away from these products, in part to limit cannibalization of their private-label credit card portfolios, are now integrating these offerings at checkout.

Roughly 80 to 90 percent of these transactions happen on debit cards, with average ticket sizes of between $100 and $110. 2 Jared Beilby, “6 need-to-know buy now, pay later statistics for small businesses,” Merchant Maverick, August 12, 2020, merchantmaverick.com. And a survey in July 2020 found that nearly 56 percent of American consumers have used a BNPL service—compared with 38 percent the year prior. 3 Maurie Backman, “Study: Buy now, pay later services continue to explode,” Ascent, March 22, 2021, fool.com. Unlike with other POS installment loans, consumers have a very high affinity and engagement, resulting in significant repeat usage. More mature consumer cohorts are using these financing products about 15 to 20 times a year and logging into these apps ten to 15 times a month to browse or shop. While the average credit score of consumers using these solutions is under 700, this has less to do with bad credit history and more to do with relatively thin credit files.

The already fast growth of Pay in 4 accelerated during the COVID-19 crisis, increasing at 300 to 400 percent in 2020 and accounting for about $15 billion in originations. McKinsey projects that Pay in 4 players are likely to originate about $90 billion annually by 2023 and to generate around $4 billion to $6 billion in revenues, not including revenues from other products they will cross-sell. Most of the originations are from higher-margin, discretionary-spend categories, such as apparel and footwear, fitness, accessories, and beauty. However, the largest players are also starting to integrate with newer categories, as in the cases of Klarna with Etsy.com and Afterpay with Houzz.com.

Given the shorter duration of financing in this model, receivables turn over about eight to ten times a year, resulting in return on assets (ROA) between 30 and 35 percent. Loss rates for more mature portfolios are comparable to those of credit cards (6 to 8 percent). 4 Review of company reporting.

Regulatory actions outside the United States

Regulators across geographies are looking at enhancing regulatory overview of some POS financing models like Pay in 4. With this in mind, industry players in some countries are trying to self-regulate to address potential regulatory concerns proactively. 1 Ranina Sanglap, “Australian buy-now-pay-later industry may need regulation to inspire confidence,” S&P Global Market Intelligence, March 9, 2021, spglobal.com.

Regulators outside of the United States, in markets including Australia and the United Kingdom, have raised concerns regarding the share of late fees charged by the Pay in 4 players. Another concern, referred to as “stacking” risks, involves consumers using too many Pay in 4 providers and getting overburdened by debt.

In Australia, the largest industry players have come together to self-regulate and issue a code of conduct intended to protect consumers. The industry leaders’ commitments include affordability checks, greater transparency on fees, and financial-hardship assistance.

In the United Kingdom, the Treasury announced that Pay in 4 players will come under the purview of the Financial Conduct Authority (FCA), which regulates financial-services firms. Pay in 4 players will be required to conduct affordability checks before lending to customers, and customers will be allowed to escalate complaints to the UK financial ombudsman.

In markets like Australia, POS financing is significantly more mature and widespread and Pay in 4 products have been around longer than in the United States; in Australia, roughly 30 percent of the adult population had an account with a Pay in 4 provider as of June 2019, 5 Buy now, pay later: An industry update - Report 672 , Australian Securities & Investments Commission, November 16, 2020, asic.gov.au. and the value of BNPL transactions grew by around 55 percent in 2020, 6 Chay Fisher, Cara Holland, and Tim West, “Developments in the buy now, pay later market,” Bulletin , Reserve Bank of Australia, March 18, 2021, rba.gov.au. in contrast to the continued decrease in credit cards in circulation. These markets are experiencing increased regulatory activity associated with POS financing (see sidebar “Regulatory actions outside the United States”). This model has a set of competitive advantages that are increasingly difficult for traditional banks and large incumbents to replicate. Key differentiators of the Pay in 4 model include the following:

• Solutions to engage throughout the purchase journey. The largest providers are transforming into shopping apps; consumers are starting their journeys within the Pay in 4 providers’ apps, not just using Pay in 4 at merchants’ checkouts. As an example, Afterpay reports that about 17 percent of their consumers initiated one or more transactions from within their shopping app in February 2021. 7 “Afterpay reports record sales of $10B in first half 2021,” PR Newswire, February 25, 2021, prnewswire.com. Shopping from within the app allows consumers to use the Pay in 4 feature even at merchants where these solutions are not integrated at checkout. For example, consumers shopping from within the Klarna app can use Klarna at Amazon, even though Klarna is not available at Amazon’s checkout.

Given the race to sign up the largest merchants over the next 18 to 24 months, Pay in 4 providers are competing heavily on price and on marketing support promised to retailers. However, they are offsetting this price compression by offering merchants affiliate marketing services: merchants pay 4 to 12 percent of the transacted amount if the customer landed at the merchant website from within the provider’s app or website. McKinsey’s semiannual POS Financing Merchant Survey of more than 200 large and midsize merchants has repeatedly shown that acquiring new consumers is more important for merchants than increased cart conversion and increased average order value across categories. This heavily influences merchants’ willingness to pay more for affiliate marketing than for financing.

As these players continue to acquire consumers at a low cost through merchant checkout (getting access to a large, low-cost feeder channel) and leverage their engagement through cross-selling, they are well positioned to become the financial-services provider of choice for new-to-banking consumers

• Advanced technological capabilities, including distinctive merchant underwriting and consumer-fraud models, deep integrations into shopping carts, and sophisticated consumer-service tools. Competing in the Pay in 4 installment market requires highly sophisticated fraud tools, because identifying the consumer’s intent to defraud at the time of the application is a lot more important than assessing ability to repay, especially given the six-week tenure of the loan. In that short time, the ability to repay is unlikely to change dramatically. Advanced underwriting requires integrations into merchants’ order management systems that enable lenders to access and leverage SKU-level data. Additionally, dispute mitigation is significant, given the high rate of returns in many of the target categories, including apparel and footwear. Managing billings in real time is crucial for mitigating disputes, because it materially reduces customer complaints for wrongful billing and payments.
• Brand and positioning. Pay in 4 players have invested heavily in building a brand image that appeals to the segments they target. Klarna leverages celebrities to further enhance its brand and distinguish itself from legacy banking providers. Merchants in fashion and similar categories value this strong brand positioning and see these providers as brand adjacent. This brand positioning has also changed the way merchants perceive these players relative to banks. Merchants look at banks as private-label credit card partners and hence will seek profit sharing from them, but the same merchants look at Pay in 4 players as partners in commerce enablement and co-marketing.

Banks and larger incumbents that are building solutions to compete with Pay in 4 players will need to address each of these differentiators to build a compelling and scalable business model. Most banks and traditional players are thinking about this only as a financing solution at checkout and have not considered how they need to cover the entire purchase journey. Additionally, banks are not effectively leveraging their existing scale to highlight their ability to drive incremental traffic to merchants. This is a missed opportunity. Integrations with shopping carts, an engaging consumer-facing app, and self-serve functionality to limit call volumes also are critical to win. The higher bar on regulation, credit reporting, and compliance also affects a bank’s ability to design seamless application experiences at checkout.

Despite these hurdles, banks will need to assess ways in which they can present themselves within purchase journeys and ideally at point of sale. The shift in volumes to credit originated at point of sale is accelerating. Neobanks that have built significant scale with a younger audience also have the potential to compete more directly in this model.

Off-card financing solutions

Typically, off-card financing solutions, such as Affirm and Uplift, offer financing on midsize purchases (between $250 and $3,000) and require payment in monthly installments. The average ticket sizes are close to $800, and the average tenure of the loans is about eight or nine months. Typical verticals include electronics, furniture and home goods, sports and home fitness equipment, and travel. Unlike Pay in 4 solutions, which are entirely merchant subsidized (0 percent annual percentage rate for consumers), off-card financing models also have originations where consumers are paying an APR—at times partially subsidized by the merchant—in the case of lower-margin verticals, such as travel.

Of the consumers who take these loans, about 80 percent already have a credit card with enough credit availability to fund the purchase. These consumers choose to take a financing product because it offers cheaper credit or easier payment terms.

Most merchants that integrate such solutions are in categories with higher-ticket, lower-frequency purchases where cart conversions are critical, given abandonment rates—which can be as high as 80 or 90 percent—and costs. According to results from McKinsey’s semiannual POS Financing Merchant Survey, the willingness to pay for POS financing is greater among merchant categories with higher costs of acquisition and higher gross margins (Exhibit 4).

Digital has been a primary driver of growth for these solutions, though in-store financing is starting to catch up: about 25 to 30 percent of originations in 2021 are expected to be in-store, using applications submitted through smart tablets. Additionally, increasing adoption across customers with higher credit scores—especially in higher-ticket financing categories—is further fueling growth. Roughly 65 percent of originated volume is prime or higher. As a result, this model has cannibalized volume from credit card issuers.

Consumers using these financing solutions tend to be less engaged with these solutions than are consumers using the integrated Pay in 4 shopping apps. Active consumers in mature cohorts, even best-in-class off-card financing players, have a repeat usage of two or three times a year, versus more than 20 times for integrated Pay in 4 shopping apps. This will be a critical metric for these players to address, given the risk of commoditization at point of sale.

Additionally, as credit-card-linked installments start becoming more readily available at point of sale, these models will see volumes move back to cards, especially in originations from higher-prime customers. Offering card-linked installments at point of sale will also enable the issuers to deliver a much more frictionless financing process and to match the 0 percent APR financing from the off-card financing providers.

Some off-card financing players are starting to make investments that can help offset this potential threat from card-linked installments by integrating across the shopping journey from prepurchase to returns (for example, Affirm’s acquisition of Returnly). Legacy financing providers are either modernizing their platforms or licensing the technology platforms from new software-as-a-service-based players to compete more effectively; an example is TD Bank with Amount at NordicTrack.

Virtual rent-to-own models

The virtual rent-to-own (VRTO) players, including AcceptanceNow and Progressive Leasing, are primarily targeting the subprime consumer base and have very high implied APRs. Most (95 percent) of the consumers have a credit score below 700; about 70 percent have a score below 600. A difference from most other models is that merchants are not heavily subsidizing APRs. On the contrary, larger merchants now receive rebates from VRTO providers on originated volumes.

Categories are typically limited to goods that can, in theory, be repossessed, but VRTO players are branching into other categories. More than three-quarters (78 percent) of all originations are across two categories: mattresses/furniture and electronics/appliances.

Most of these players are integrating digitally and in-store as second- or third-look financing providers; examples include Progressive Leasing at Best Buy and Katapult at Wayfair. For larger lenders and issuers, there is an opportunity to partner with one of these players to enhance the breadth of the credit box and make the proposition more compelling for merchants. Subprime issuers have an opportunity to address this need through their existing card solutions.

Card-linked installment offerings

Card-linked installments are the prevalent form of financing at point of sale across Asia and Latin America. In contrast, US card issuers have launched post-purchase installment functionality (for example, American Express Plan It and Citi Flex Pay), but the adoption rates have stayed low. In the United States, these post-purchase installments cannot compete with the 0 percent APR solutions offered at purchase.

However, card-linked at-purchase installments do have the potential to materially gain scale, as they can enable merchant-subsidized offers. Another highly underserved opportunity is in prepurchase journeys: before buying, issuers can enable consumers to select merchant transactions they want converted into installments. This can be done by using the existing offer portals that most issuers have—examples include Amex Offers for You, BankAmeriDeals, and Capital One’s Capital One Shopping asset. This is a significant opportunity to address merchant needs met by the integrated Pay in 4 shopping apps.

Currently, card-linked installments at purchase are offered in the United States through fintechs like SplitIt; network-offered solutions in pilot stages, like Visa Installments; or cobranded or narrowly targeted merchant partnerships, such as the ones Chase and Citi have with Amazon. Average ticket sizes are around $1,000, and adoption is greater in higher credit bands.

Card-linked installments will be a table-stakes capability in the coming years, but the players who can integrate this across the purchase journey and effectively monetize prepurchase offerings are likely to be able to differentiate.

Vertical-focused larger-ticket plays

A model very similar to the way sales financing has worked historically is vertical-focused larger-ticket plays. This model usually has category specialists; examples include CareCredit in healthcare and GreenSky in home improvement.

Average ticket sizes for healthcare can range between $2,000 and $10,000, with elective healthcare categories like dental, dermatology, and veterinary accounting for a majority of the originations. Nonelective healthcare is still underserved.

In home improvement, average ticket sizes can vary between $5,000 and $50,000, depending on subcategories. The larger categories are heating, ventilation, and air conditioning (HVAC); windows and doors; roofing and siding; and remodeling. Players tend to achieve scale through partnerships with original equipment manufacturers (OEMs). Solar financing, while growing, is a more complex vertical, given larger loan tenures and tax credit implications. Home improvement financing has been cannibalizing volumes for home equity lines of credit and personal loans, so traditional lenders need to assess how to compete in this model.

As this space gets increasingly competitive, there is growing margin pressure and a greater need for experience. Players trying to scale in this space will have to assess which subcategories to focus on, whether they want access to the end-consumer relationship, and which go-to-market approach to pursue. Banks can target this space to acquire high-credit customers and to cross-sell mortgage refinancing and other banking services.

How traditional players and other fintechs can compete

The traditional players should treat the variety and growth of POS financing as a signal to rethink the lending landscape. To achieve long-term growth, lenders of all kinds will need to address three core changes in consumer experience related to borrowing:

• Product-agnostic delivery of credit. The lines across traditional credit products are already blurring, as banks offer loans against open credit card lines and fintechs offer installment-based credit cards or debit cards with Pay in 4 features. Underwriting therefore needs to be agnostic of the product through which credit is being delivered—say, personal loans or credit cards. Banks that do this early and well while managing economics and risk will benefit significantly.
• Integration and engagement across the entire purchase journey. A big differentiator for banks will be integrating across the entire purchase journey, leveraging affiliate marketing to subsidize both credit and rewards costs, and delivering greater control and value to the end consumer. These integrations not only contribute to scale and engagement but also help banks get much better access to and visibility into younger consumers and their credit behavior. Integration at checkout alone will not be enough, as the providers not offering incremental value to the merchant in prepurchase journeys will get commoditized.
• Habituation to subsidized credit and enhanced value. As consumers get habituated to merchant-subsidized credit, banks need to rethink their risk and economic models and even the underlying value propositions. US banks might imitate Australian banks that have launched interest-free credit cards to address the expectations set by Pay in 4 providers across the younger consumer base that credit can be accessed at 0 percent APR. Merchant partnerships of some form will be critical to enable this, and merchant acquirers can play a big role in being the intermediaries to scale this model.

Traditional issuers and lenders, merchant acquirers, and neobanks each have a mix of assets that gives them a right to play in this space. But competing will require players to assess which is the right business model to focus on, which verticals to prioritize, and how to go to market. Players can choose from a mix of go-to-market models to access this space (Exhibit 5).

The go-to-market models vary in their expected return on assets, technology requirements, size of investment, and speed to market. In fact, these are just a few of the relevant considerations. Banks also need to make decisions across each step based on implications on required capabilities, compliance and risk, consumer experience, vertical focus, competitiveness of offering, and other factors.

Growth in point-of-sale financing is a secular trend, and regardless of whether the existing players survive, the underlying consumer needs addressed by POS financing will affect consumer choice over the long run. Moving fast to have a clear strategy and some path to enter and play in this market will be critical. While this evolution of POS financing may seem slow to scale for now, it is likely to accelerate. Starting to make investments to address this trend should be on every banking player’s strategic road map.

Puneet Dikshit is a partner in McKinsey’s New York office, where Diana Goldshtein is a knowledge expert, Udai Kaura is an associate partner, and Felicia Tan is a consultant; Blazej Karwowski is an associate partner in the London office.

Explore a career with us

Related articles.

US lending at point of sale: The next frontier of growth

A Proposed Framework for Assessing BNPL (Buy Now, Pay Later) Adoption and its Impact on Consumers' Buying Behavior

• December 2023
• KnE Social Sciences

• Universiti Teknologi PETRONAS
• This person is not on ResearchGate, or hasn't claimed this research yet.

Abstract and Figures

Discover the world's research

• 25+ million members
• 160+ million publication pages
• 2.3+ billion citations

• Kansascityfed Www
• Org/Psrb 1 Federal
• Julian Alcazar

• Huaxin Peng

• Sheikh Muhammad Zahid

• Yannick R. Mulders

• CHINA ECON REV

• Yiping Huang
• EUR J MARKETING

• Arvid O. I. Hoffmann

• Recruit researchers
• Join for free
• Login Email Tip: Most researchers use their institutional email address as their ResearchGate login Password Forgot password? Keep me logged in Log in or Continue with Google Welcome back! Please log in. Email · Hint Tip: Most researchers use their institutional email address as their ResearchGate login Password Forgot password? Keep me logged in Log in or Continue with Google No account? Sign up

Stripe logo

Global payments.

Online payments

• Payment Links   No-code payments
• Checkout   Prebuilt payment form
• Elements   Flexible UI components

In-person payments

Fraud prevention

Acceptance optimizations

Embedded payments and Finance

Payments for platforms

Financial accounts

Customer financing

Physical and virtual cards

Revenue and Finance Automation

Subscriptions and usage-based

Accounting automation

Sales tax & VAT automation

Online invoices

Custom reports

Data warehouse sync

Access to 100+ globally

Accelerated checkout

Linked financial account data

Online identity verification

Startup incorporation

• Enterprises 
• Startups 

By business model

• Ecommerce 
• Platforms 
• Marketplaces 

By use case

• Finance automation 
• Embedded finance 
• Global businesses 
• Crypto 
• Creator economy 
• Stripe App Marketplace 
• Partners 
• Professional services 
• Documentation 

Get started

• Prebuilt checkout 
• Libraries and SDKs 
• App integrations 
• Accept online payments 
• Manage subscriptions 
• Send payments 
• Full API reference 
• API status 
• API changelog 
• Build on Stripe Apps 
• Support center 
• Support plans 
• Guides 
• Customer stories 
• Sessions 
• Contact sales 
• Newsroom 
• Stripe Press 
• Become a partner 

Start integrating Stripe’s products and tools

• Code samples 
• Set up in-person payments 
• Chat With Us 

Why you should use buy now, pay later (BNPL) payment methods for your business

This guide covers how buy now, pay later methods work, how to choose a provider, and how Stripe can help.

Accept payments online, in person, and around the world with a payments solution built for any business—from scaling startups to global enterprises.

• Introduction

What is buy now, pay later (BNPL)?

Do buy now, pay later payment methods affect a customer’s credit score, how do buy now, pay later services make money, what are the benefits of buy now, pay later services, do customers or businesses pay more when using buy now, pay later, are buy now, pay later payment methods right for my business, buy now, pay later provider comparison, how do i set up buy now, pay later for my business, how stripe can help.

• Get started with Stripe 

Buy now, pay later has emerged as one of the most popular payment methods: More than half of US customers have used a buy now, pay later service, and almost 10% of ecommerce transactions in Australia are paid using a buy now, pay later provider. It was the fastest growing payment method in 2020 in India and the UK , and analysts estimate that these services will account for 12% of total global ecommerce spend on physical goods by 2025.

Buy now, pay later (BNPL) is an alternative payment method that allows customers to purchase products and services without having to commit to the full payment amount up front. In doing so, customers have the ability to immediately finance purchases and pay them back in fixed installments over time. For example, a customer making a $100 purchase could pay for the item in four interest-free installments of $25.

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.

This guide covers the basics of buy now, pay later payment methods. You'll learn how they work, how to choose a provider, and how Stripe can help.

How do buy now, pay later services work?

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.

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.

For consumers, buy now, pay later services can offer a convenient, affordable way to make purchases. Buy now, pay later providers also take steps to ensure they offer responsible lending and services to consumers. For example, they provide information to consumers about the money they owe and how they set their fees, and require businesses to adhere to guidelines for how they communicate these services to their customers. Given the growing popularity of these services, some governments are considering introducing new rules in order to promote responsible practices and ensure consumers understand the product. Stripe is following these developments closely to understand how consumers and businesses might be affected.

Generally, customers do not end up paying more money when using buy now, pay later payment methods.

Additionally, the cost of a product or service does not change when using a buy now, pay later service. If a product is priced at $100, the customer would still end up paying $100 to the business making the sale.

However, there may be associated processing fees for businesses that choose to provide a buy now, pay later service. The cost of using a buy now, pay later service will depend on the provider.

Buy now, pay later payment methods are beneficial for most business, especially:

• Retailers selling high-value goods and services, such as luxury items or travel fares that want to boost conversion
• Retailers selling low-value goods and services that want to increase average cart size and reach new customers who might not have credit cards or the means to pay the full cost up front

With that said, buy now, pay later services might not be a good fit for your business if:

• Your customers are businesses. Buy now, pay later methods offered on Stripe are only supported for consumers.
• Your business relies on subscriptions or recurring purchases. Buy now, pay later methods don’t currently support invoicing or subscriptions.

How do you choose a buy now, pay later provider?

Selecting the right buy now, pay later provider depends on the types of items you sell, the price of those items, and your customer base. When evaluating providers, consider the following:

• Repayment terms : Buy now, pay later providers offer different installment plans and term lengths, ranging from a few weeks to multiple years. If your business typically has a high average order value, look for buy now, pay later providers that offer repayment over a longer period of time (like having customers pay monthly installments over six months). On the other hand, businesses with a lower average order value may be able to offer fewer installments over a shorter amount of time, like four installments over six weeks.
• Credit limits : Every customer will have a different spending limit based on their usage, credit, and/or repayment history, but some buy now, pay later providers have minimum and maximum credit limits. Again, evaluate your average order value and select a provider that offers enough credit for customers to successfully make a purchase.
• Customer location : Decide in which markets you’d like to offer a buy now, pay later service based on where your customers are located. This may mean offering more than one buy now, pay later provider to maximize your geographic coverage. You may also want to select the buy now, pay later provider that is most popular in the region; for example, Afterpay and Zip are the most popular buy now, pay later services in Australia, while Klarna is most popular in Germany and the Nordics.

Find relevant buy now, pay later services by reviewing the profiles of Stripe-supported options below. You can also see which payment methods are available for your account by visiting the Dashboard .

Learn about Stripe’s pricing for buy now, pay later payment methods.

*Late fees may apply. Eligibility criteria apply. See www.afterpay.com for more details. Loans to California residents made or arranged pursuant to a California Finance Lenders Law license. © 2021 Afterpay US

Affirm is modernizing consumer credit and changing the way people shop. Their predictive technology delivers personalized payment options that are tailored to each purchase, including flexible payment plans from 4 interest-free payments every 2 weeks to longer installments up to 36 months.

Affirm partners with 235K retailers and has a network of over 31 million addressable customers in the US. Customers have the flexibility to buy what they want today and make simple payments over time. Affirm’s transparent terms (no fees, no compounding interest) boost customer satisfaction and can result in higher conversion rates and repeat purchases for merchants.

Start accepting Affirm

Afterpay, also known as Clearpay in the UK, allows customers to break up their payment into interest-free installments with Pay in 4, and finance higher value orders with monthly interest-bearing installments (available in the US only). Afterpay is available in Australia, Canada, New Zealand, the UK, and the US and has 20 million active consumers.

As a leader in the buy now, pay later space, Afterpay sets sensible and transparent initial spending limits for new customers that may increase over time, rewards customers for responsible spending, and has developed a one-stop solution for in-store and online shopping.

Start accepting Afterpay

Klarna offers the most variety in payment options, which gives customers more freedom to choose when and how to pay for a purchase. Klarna provides payment solutions for more than 150 million shoppers and 450K+ businesses and is active in 45 markets.

There are four different ways for customers to pay for a transaction with Klarna: Pay in Installments, Pay Later, Pay Now, and Financing:

• Klarna Pay in Installments allows customers to make an online purchase and spread the cost over three or four interest-free payments.*
• Klarna Pay Later in 30 days lets customers immediately complete a transaction and pay the full amount later, at no additional cost.
• Pay Now is offered in many European countries and lets a customer pay for a transaction immediately using stored payment credentials. Supported payment methods include bank transfers or direct debit.
• Klarna Financing offers customers up to 36 months of credit. To receive financing, they complete a one-time application. If approved, customers make their monthly payments to Klarna online or in the mobile app.

Start accepting Klarna

Zip, a leading global buy now, pay later company, provides options to simplify how customers pay with a variety of flexible payment options. Customers in Australia choose to pay in “N” days with weekly, bi-weekly, or monthly payment schedules. It’s a familiar payment method used by 3.2 million customers and 43,200 retailers in Australia and New Zealand.

There are two ways for customers to pay for a transaction with Zip:

• Zip Pay: For everyday purchases, customers can split up purchases up to $1,000 with no interest or up-front payment. Customers choose to pay in “N” days with weekly, bi-weekly, or monthly payment schedules.
• Zip Money: For larger purchases over $300, customers can split up a purchase up to $5,000, interest-free for three months with no up-front payment. Customers choose to pay in “N” days with weekly, bi-weekly, or monthly payment schedules. Select businesses can also offer up to $50,000 with interest-free offers from 6 to 36 months.

Start accepting Zip

Setting up buy now, pay later payment methods for your business is simple. Once you’ve selected a buy now, pay later provider that aligns with your business goals, you’ll likely undergo an application process that includes providing information about your company. Another option is to integrate directly with a software provider to expedite implementation and ease of use. For example, with Stripe, once approved, our team will help you integrate the BNPL service into your website, and you’ll be able to provide buy now, pay later services as an additional payment method for your customers.

Ecommerce companies around the world use Stripe to accept multiple payment methods— including buy now, pay later—and simplify global operations. Stripe is making it possible to accept buy now, pay later options in minutes with a single integration. Stripe offers:

Fast and seamless integration options

Stripe’s product suite comes with built-in global payment support so you can offer the most relevant payment experiences for your customers.

• Stripe’s payment surfaces let you add new payment methods, including buy now, pay later, directly from the Stripe Dashboard—no coding required. Stripe’s machine learning algorithm then dynamically shows customers the most relevant payment methods.
• Drive up-funnel conversion by adding Stripe’s Payment Method Messaging Element , which helps your customers know which buy now, pay later payment options they have at checkout directly from your product, cart, or payment pages.
• Platforms and marketplaces can use Stripe Connect to accept money and pay out to third parties. Your sellers or service providers benefit from the same streamlined Stripe onboarding and get instant access to select payment methods.
• Stripe’s Payments API makes it easy to support multiple payment methods through a single integration. This leaves you with a unified and elegant integration that involves minimal development time and remains easy to maintain, regardless of which payment methods you choose to implement.

No paperwork

Eligible businesses can accept any of these buy now, pay later options with Stripe in minutes—there is no additional application, onboarding, or underwriting process to get started. Find out which buy now, pay later options you are eligible for by visiting the Dashboard .

Unified monitoring and reporting

Payments made with any payment method, including buy now, pay later services, appear in the Stripe Dashboard, reducing operational complexity and allowing for lightweight financial reconciliation. This enables you to develop standardized processes for typical operations such as fulfillment, customer support, and refunds.

For more information on supporting buy now, pay later payment methods with Stripe, read our docs or contact our sales team . To start accepting payments right away, sign up for an account .

Ready to get started?

Payments docs.

How does Buy Now Pay Later (BNPL) work for businesses?

Buy now, pay later options drive a new line of customers for retailers with a new repayment incentive.

To attract a wider reach of customers, many retail business owners with POS systems are adopting a Buy Now, Pay Later (BNPL) payment model. The BNPL method has been evolving in big part due to changes set on by COVID-19 and the increase we have seen in online shopping.  

So what exactly is BNPL for business, and how can it help accelerate your profits? We explore the answers to this question to help you get started and attract a new type of customer. 

What is buy now, pay later? BNPL definition

According to the latest figures by merchant services giant Worldpay, as noted by retail-week.com, “BNPL is now the fastest-growing online payment method – accounting for more than 5% of all ecommerce spending. This has seen the BNPL market treble in size in 2020, with 5 million people using BNPL since the start of the pandemic.” 

This payment method allows consumers to spread out the cost of paying for their goods and services, typically over the span of six week in four equal payment instalments. The period of time to pay back the money and the payment instalment amount can vary. 

At first glance, this appears similar to layaway, or just using a credit card. So what is the difference? Well, one big difference is many BNPL options come without interest. Another point of note is the retailer requires that the consumer select a payment option up front, for example, six payments on a certain date, predetermined with the purchase. 

As a retail owner or manager, you simply can’t ignore this shift in payment method as it offers financial inclusivity to those who need help spreading out the cost of their payments without the added interest. 

Learn how financial services and payment processing company Stripe can help your business thrive with their easy to use, efficiently created minimalist Stripe POS system . 

A report by cnbc.com  explains that the consumer payment trend was pioneered by Swedish fintech Klarna and Australian firm Afterpay. In fact, in October 2021, financial services software company and POS system provider, Stripe , partnered with Klarna to offer businesses buy now, pay later options after Klarna had already successfully launched into the consumer bank account market. 

Other popular financial tech moguls such as PayPal, Amazon , and Apple have also jumped on the bandwagon and begun adapting their own forms of BNPL to stay up with the competition.  

A quick history of how BNPL became so popular

In order to understand what BNPL is and how it became so popular, let’s dial back to how it started. There have been various other options, such as layaway, that big-box retailers have utilized in the past. 

These options have dissolved in big part due to the increase of credit card use. Retailers adopted their own versions with store credit cards often pushed at point of sale which allows the store to control the consumer experience more and build on brand loyalty with additional purchases. 

Are you a pro? Subscribe to our newsletter

Sign up to the TechRadar Pro newsletter to get all the top news, opinion, features and guidance your business needs to succeed!

Fintechbusinessweekly.com explains that key elements of BNPL are typically smaller purchases, and no credit check or traditional underwriting. BNPL services do not share user data with credit bureaus, thus this debt is not available to creditors. 

There is no interest if payment is on time, and typically 25% of the total purchase is paid at the time of purchase with three follow up payments in two-week intervals. The purchaser is required to tie a debit or credit card to the BNPL purchase and agree to automatic payments following. 

How does BNPL work for businesses? 

BNPL is a service provided by a third-party supplier which gives customers an alternative payment option upon checkout. Here is a quick overview of the process. 

1. The customer purchasing from you is required to pass a quick credit check.

2. Then, the BNPL provider pays the retailer owner (you) the full amount.

3. The customer is required to pay the third-party service provider back over time in a series of instalments.

4. The credit check is not in depth and does not affect the purchaser’s credit score. 

The time frame and percentage of the instalment payments is determined by which third-party service the retailer chooses to incorporate into their POS system . Favourite BNPL providers include Clearpay, Laybuy, PayPal and Klarna. 

Some providers offer a set number of payments, such as PayPal's 'Pay in 3' process, whereas others allow their customers to choose how much they want to pay over a three to twelve month time period. 

Types of BNPL service options for retailers

There are two types of BNPL service options for retailers to consider: a merchant transaction fee loan, and a consumer interest loan. 

Merchant transaction fee loan

With a merchant transaction fee, the customer is not charged any interest to their overall purchase, as long as payments are made on time. Instead, the merchant incurs a one-time transaction fee of 2-8% on average. While this fee can be a deterrent to some retailers, the option of BNPL can lead to customer acquisition, retention, and higher purchase amount.

Consumer interest loan

The other option, which is consumer interest loan, involves an interest rate applied to the purchase at the point of transaction, resulting in the business owner being relieved of additional fees. This is an appealing option for retailers but can be less attractive to the shopper. 

What are the benefits of BNPL for business? 

The top 10 benefits of BNPL for businesses owners: 

1. The BNPL provider is responsible for any chargebacks rather than the merchant.

2. The convenience of transparency between BNPL provider and business owner through a sales dashboard.

3. BNPL opens your business to a new customer base who may not have been able to afford your product/service before, leading to more sales and increased customer retention.

4. An option to accommodate customers with unexpected or emergency purchases.

5. A new way to purchase goods and services, enhancing your overall brand and customer experience.

6. BNPL helps target a specific, younger, modern customer demographic. 

7. BNPL providers accept the liability of fraud of the purchases.

8. Reduce shopper hesitation with a convenient feasible payment option.

9. Consumers do not need to worry about another credit card in their wallet as it is all done online, through the store, and a mobile app.

10. Retailers can provide a well-rounded, branded shopping experience.

What are the different types of Buy Now, Pay Later repayment options?

With the booming BNPL industry attracting significant bank revenue and enhancing the overall shopping experience for many retailers, retailers are choosing to update their POS systems with this new payment option. With so many vendors entering the scene, which BNPL provider should you choose for your business? H ere are five of our favorite options: 

Most of these providers offer apps that consumers can download on their mobile phones or tablets to provide for easy-to-access payment options. Common online retailers like Amazon also offer their own buy now pay later services. 

Final thoughts on BNPL

For businesses

At this point in time, merchants have a relatively safe opportunity to increase sales and gain new, younger customers with the buy now pay later services. Retailers should be aware that as this method of payment grows, so will the threats for fraud connected to it. 

Stay up to date on anti-fraud prevention tools and news to avoid being caught off guard and enjoy offering your customers a new opportunity to spend more and leave satisfied.

For customers

It should be noted that the buy now, pay later consumer repayment method is not currently financially regulated meaning customers have little protection in the likely event of any financial dispute. 

In the U.K., regulation is  soon to be introduced in the near future . It's uncertain how quickly this will happen in the U.S. however as the products and services purchase through BNPL are not within the longer-term credit products/services remit regulated by the Truth in Lending Act.

Looking for a POS system supported by BNPL? Take a look at our guides to choosing the best  POS systems for small business ,  POS systems for restaurants , and  POS systems for retail . 

With over 13-years-of-experience in the marketing, public relations and non-profit fields, Erin is a driven copy and content writer, digital designer, strategic planner and public speaker. Throughout the course of her career, Erin has managed multiple teams, bringing sales and marketing success to non-profits and for-profit organizations. She brings empathetic, devoted leadership to the team, drives growth through tactical thinking and a consummate work ethic. 

Sage is off 50% for three months if you grab it today

Xodo PDF editor review

Backbone One 2nd Gen review: one of the best mobile controllers gets better

Most Popular

• 2 This is getting ridiculous! Samsung preparing a 256TB SSD for AI servers only, just weeks after showing off 128TB model
• 3 Quordle today – hints and answers for Thursday, September 5 (game #955)
• 4 NYT Connections today — hints and answers for Thursday, September 5 (game #452)
• 5 NYT Strands today — hints, answers and spangram for Thursday, September 5 (game #186)

• Work & Careers
• Life & Arts

Is ‘buy now pay later’ a viable business model?

• Is ‘buy now pay later’ a viable business model? on x (opens in a new window)
• Is ‘buy now pay later’ a viable business model? on facebook (opens in a new window)
• Is ‘buy now pay later’ a viable business model? on linkedin (opens in a new window)
• Is ‘buy now pay later’ a viable business model? on whatsapp (opens in a new window)

Jemima Kelly

Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

Those of you who keep an eye on what’s happening in fintech will know that, outside of the fantastical land of crypto and non-fungible delights, the hottest game in town right now is “buy now pay later” — or BNPL as it is widely known (best pronounced as buh-n-pul ).

The market has, until now, been dominated by BNPL pioneers like Sweden’s Klarna — Europe’s heftiest fintech unicorn at a valuation of over $45bn — and Australia’s AfterPay, which in August was acquired by Jack Dorsey’s Square for a tidy $29bn, the largest takeover in the Land Down Under’s history.

But ever more firms are now jostling for a taste of that sweet BNPL sundae. Just last week, old-man “fintech” Mastercard said it would launch a product called “Mastercard Installments” next year. Apple and Goldman Sachs have said they are joining forces to offer a service called “Apple Pay Later”, while BNPL big dog Affirm recently announced a partnership with Amazon that will allow US customers to split the cost of any purchases over $50, and PayPal launched its own version of the product last year.

In the UK, Revolut has said you’ll soon be able to switch on a button and “your card becomes a buy now pay later product”; Monzo recently announced a similar service — “Monzo Flex” . You get the picture.

Clearly, BNPL is growing rapidly — its use trebled in the UK during 2020 — and it is doing so from a low base: it still only represents about 2 per cent of the ecommerce market globally, and about 1 per cent of Britain’s credit market. So there is plenty of room to grow. But does it constitute a sustainable business model on its own?

Redburn, the UK equity research house partly owned by Rothschild, doesn’t think so. Last week they published a report in which its analysts deduced that “BNPL as a standalone business is not viable”. With such a punchy top line, we thought it was only fair to share some charts and nuggets from the note.

First, investors are clearly taking notice of these firms. Take a look at this chart showing how the valuations of standalone BNPL companies stack up with those of traditional lenders (ie banks), and even payments companies that are themselves getting into the market:

As you can see on the chart, while the valuations of vanilla lenders range from between about 2 to 4 times forward revenue, the multiples commanded by BNPL firms’ valuations are as high as 58 times.

And that’s despite none of these companies actually making money. Having been profitable for its first 14 years in business — a considerable achievement in fintechland — Klarna went into the red in 2019, and has gone deeper into it since. In fact none of the big three standalone BNPL firms are currently making a profit:

So what is the appeal of BNPL in the first place? According to Redburn, the key thing, like much of the rest of the tech world, is customer acquisition. But customer acquisition is all very well if you have other products that you can direct your newly acquired customers on to; it’s less good if you don’t:

What BNPL does offer is an excellent route for accelerating customer acquisition, which businesses with a wide array of products can monetise through bundled payment pricing. As such, companies like PayPal and Square are well placed. However, for pure-play BNPL players, the option is to evolve, be acquired or end up disappointing on long-term profitability. 

One the key reasons BNPL has been able to grow so rapidly, and the reason valuations are so high, is the sector is very lightly regulated . But that is likely to change, says Redburn, particularly when the credit cycle eventually turns:

A credit event will not only result in losses but . . . probably in a material amplification of pressure from governments and regulators.  At the very least, the credit checks required by banks when making loans could be bought in to the BNPL sector, slowing the customer acquisition enticed by its current minimal checks.  

The lack of regulation so far has helped BNPL firms grow rapidly and keep costs down; when tougher rules are brought in, profit margins will be squeezed. Here’s a chart showing a typical pricing structure, assuming the retailer pays 4 per cent to the BNPL vendor:

As Redburn points out, a 30-basis-point gross profit margin is similar to non-BNPL payments companies. But these companies aren’t taking the same kinds of risks:

Once we factor in interchange, network fees, issuer processing fee, credit losses and funding, there is little left for the BNPL provider . . . The 30bp margin in and of itself, with a scalable business, can be lucrative.  Adyen, for example, makes c20-30bp per dollar processed and has an EBITDA margin north of 60% owing to the scalability of its platform. A critical point, however, when considering the relative investment case, is that Adyen makes a similar margin to a BNPL without assuming a material credit or funding risk.

Redburn concludes that in order for BNPL businesses to stand a chance of surviving, they will either have to be bought up by a bigger player that can use the service as to cross-sell other products, or the companies themselves will have to start offering other services.

The latter is what Klarna is doing. Redburn again:

We hosted Klarna at our FinTech conference in June 2021 and it was clear its plan was to move  towards the ‘super-app’ model. Its revenue stream is already diverse, with affiliate  revenues from merchants running at a 400-1,000bp margin. If BNPL can increase affiliate revenues, this offers a path to monetisation away from pure-play BNPL. The end goal is to become an ecommerce platform with payments at the heart of its monetisation model. BNPL was a stepping-stone to acquiring customers, something  it has done spectacularly.  

But even if these BNPL companies do evolve in this way, however, we still have doubts — we don’t see a clear path to profitability for fintech super-apps in countries that already have developed financial systems and high levels of financial inclusion too, as we have expressed here a few times before .

Redburn concludes that:

While BNPL is currently the talk of the town, ultimately it is simply a tool  to attract new customers on to new forms of payment, and to continue the move  towards a world in which digital wallets reign and the costs are transferred from the  consumer to the merchant.  

Klarna CEO Sebastian Siemiatkowski said in August that the company might consider an IPO as early as 2022. We are sure it will be popular. But for investors, it might end up being a case of buy now, regret later.

Promoted Content

Follow the topics in this article.

• Jemima Kelly Add to myFT
• FT Alphaville Add to myFT
• Fintech Add to myFT
• Financial services Add to myFT
• Technology Add to myFT