Buy Now Pay Later

What is Buy Now Pay Later?

Buy Now Pay Later (BNPL) allows your customers to complete a purchase without upfront payment in exchange for making payments in the future until the remaining balance is paid in full. BNPL providers enables customers to use this payment method on multiple e-commerce sites and combine their purchases into a single monthly payment at a low or 0% interest rate.

How do customers experience BNPL?

BNPL providers often have their own combined checkout which allows for a customer to choose future payment as an option alongside card or direct debit payment options. Depending on the provider and country the customer is from, a soft credit check can be done before allowing the customer to use this payment option.

What risks are involved with BNPL?

In a consumer transaction, the BNPL provider is required to maintain a payment schedule with the customer and can utilise different collection methods outlined in their terms and conditions in cases where repayment does not occur. Consumers are liable for the debt and depending on the country it is serviced no different than credit card debt. Risk is low especially when you have consumer credit scores and individual consumer data as a basis for your decision to allow for BNPL.

In a business to business (B2B) transaction, the BNPL provider may be a consumer grade platform, a business financing operation willing to offer credit equal to the purchase amount, or likely your business who allows for credit terms. B2B transactions are usually larger in amount than consumer purchases but the checkout experience is almost the same procedure. The BNPL provider needs to complete a one-time Know Your Customer (KYC) process along with some form of credit check to determine if this payment option will be offered. Risk is dependent on these 2 processes and missed payments are serviced similar to a collections agency.

B2B transactions that are completed with BNPL carry a credit risk for the provider until payment is completed in full. Merchants who enable this payment option on their checkouts often pay for this risk to be transferred to the provider in the form of merchant fees similar to a how card payments are handled.

How can this credit risk be mitigated?

If you are the BNPL provider looking to win more business while limited your credit risk, you have a few options:

• Assume the credit risk and try to find a credit insurance policy broad enough to cover your entire operations. Pay your policy premium up front regardless of how much volume you service, potentially buying more insurance than you need. Additionally you need to rationalise the cost of the insurance across all merchants which can be difficult to do without a simple flat-rate increase in your merchant fees.
• Use a credit insurance API to get real-time insurance quotes for BNPL transactions to gain flexibility and control on how you want to handle your premium costs. Enable the feature on a merchant by merchant basis and/or for business customers who meet your eligibility criteria.
• Assume the credit risk and do nothing.