More and more merchants and customers are taking advantage of Buy Now, Pay Later (BNPL), e-commerce’s popular new payment option.

According to a recent report from Worldpay, a payment processing firm owned by Fidelity National Information Services, BNPL transactions in 2020 amounted to some US$97 billion – roughly 2.1% of global digital transactions. That number is expected to double to 4.2% by 2024.

But what, exactly, is making BNPL so popular? Let’s follow the money and see.

For consumers, BNPL is a way to spread out the pain of purchases over time. Particularly helpful is the absence, in most cases, of interest charges. Because of this – and in contrast to traditional credit cards – the system saves customers from having their monthly bills balloon out of control.

Payments are carved into a series of fixed installments, with bi-weekly or monthly due dates. That can make outlays, especially on big-ticket items like major appliances, more digestible. It’s a helpful way to shop on a budget or to acquire what you need while waiting for a paycheck.

BNPL can prove particularly handy in tough times. According to research, of shoppers who increased BNPL usage during the pandemic (that’s about two-thirds of all users surveyed), more than 40% said they were saving money in case of emergency, while a quarter said they had lost income due to the public health crisis.

Most BNPL services require only a so-called soft credit check, which has no impact on consumer credit ratings and spares them from inquiries that can lower credit scores, trigger higher interest rates or cause difficulties obtaining loans. This makes them particularly appealing  to financially pressed shoppers or those with weak credit.

There’s the convenience too, of course, which has its own incalculable value. Creating a customer account needs only be done once and usually is completed in a few minutes. From then on, online purchases can be made with a simple click of a button.

Benefits to Merchants

BNPL offers a different set of advantages to retailers.

Under a typical BNPL agreement, merchants pay providers a cut of the value of each sale done with point-of-purchase borrowing. Rates tend to range from 2% to 8% of the sale.

But that outlay can bring sizable returns. Studies are finding that younger shoppers are drawn to BNPL, a boon for merchants seeking to expand their markets and their appeal to newer generations of buyers. Research by Equifax, for example, has found that roughly a third of BNPL users in the UK are between 20 and 30 years old.

In the United States, the use of BNPL grew almost 50% from July 2020 to March 2021. Among the youngest adults, ages 18 to 24, the increase in use was 62%. But older shoppers were no slouches -- among consumers over age 55, the increase in use was a whopping 98%.

Sales in certain sectors in particular have boomed with the growth in point-of-purchase lending. Consumers using BNPL are spending 51% more each month on clothing than other online shoppers, according to Equifax. Nearly half of users say their BNPL usage was mostly focused on electronics, followed by clothing, furniture, appliances and household essentials.

For retailers, there are big benefits from offering shoppers a more frictionless experience. The speed of BNPL transactions means checkout isn’t slowed down by an onerous system riddled with potential pitfalls. Consumers are more likely to progress from browsing to buying, and less likely to abandon their digital shopping carts.

According to Canada’s PayBright, some merchants report increases of as much as 25% in sales conversions, as much as a 30% jump in average orders and some 20% more repeat business. More than a third of BNPL users say they use the system at least once a month.

And retailers who once relied on their own financing can escape the hassle of assessing each customer’s ability to pay. That’s taken care of.

Where Finance Providers Fit In

Now we come to the providers themselves – the third element of this equation.

They benefit in a number of different ways from this arrangement.

The first and most obvious is by sharing in the sales retailers generate through BNPL usage. But they also reap revenue from interest charges that may be levied on long-term purchases, when customers pay late fees or when deferred interest kicks in due to tardy or missed payments.

There is some variation here.

Some providers charge consumers a fee with each payment. At Zip, for example, the fee is $1 per installment. PayBright, meanwhile, charges no interest on many transactions but can tack on as much as 29.95% APR on others, depending on the merchant. Also, some of its plans include a monthly processing fee.

Late fees might range from $5 to $15. Industry leader Afterpay charges $8 or 25% of the transaction, whichever is lower, for tardy settlement.

PayPal Credit charges late fees of up to $40, returned payment fees of up to $29 and interest rates of 23.99% on the entire cost of the purchase. These penalties kick in if the six-month payment requirement isn’t met.

Unfortunately, the temptation of easy borrowing can lead some consumers to overload on debt. Nearly a third of BNPL users have made a payment late or had to pay a late fee, a rate that jumps to more than 47% among young consumers aged 18 to 24, research shows.

In the U.K., an estimated £39m ($53 million US) in late fees were levied on shoppers from mid-2020 to mid-2021, said Citizens Advice, an organization that provides support to people with legal and financial difficulties.

Some providers, such as Sweden’s Klarna, are making an effort to warn consumers against excessive borrowing and urge them to stay “within their means” when they shop.

Looking Ahead

Properly used, Buy Now, Pay Later can be a win-win-win for retailers, consumers and finance providers.

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