How to Offer Buy Now, Pay Later Options with Your Payment Gateway

04 October 2024

Written by Libby James

Libby James is co-founder, director and an expert in all things merchant services. Libby is the go-to specialist for business with more complex requirements or businesses that are struggling to find a provider that will accept them. Libby is regularly cited in trade, national and international media.

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Adding Buy Now, Pay Later (BNPL) options to your payment gateway can greatly enhance your customer experience, boost conversion rates, and increase your overall sales. By partnering with the right BNPL provider, ensuring smooth integration, optimising the customer journey, and maintaining compliance, you can offer flexible payment methods and stay competitive in the dynamic e-commerce market.

What is Buy Now, Pay Later?

Buy Now, Pay Later is a flexible payment method that enables customers to make purchases without paying upfront. Instead, the payment is deferred to a later date or divided into smaller, manageable instalments—often interest-free or with minimal interest charges. This allows customers to buy items or services immediately and spread the cost over time.

For example, a customer might purchase an item today and choose to pay the full amount at a future date or divide the payment into smaller instalments. A soft credit check is typically carried out when a customer selects BNPL as their payment option, and if approved, a point-of-sale loan is provided to complete the purchase.

How Does Buy Now, Pay Later Work?

Here’s a simple breakdown of how BNPL works in e-commerce settings:

Customer Proceeds to Checkout:Once customers add items to their basket, they proceed to checkout as usual.
BNPL Option is Displayed: Customers are presented with the option to pay later. This option is provided by a third-party BNPL provider, such as Klarna or Afterpay.
Soft Credit Check is Conducted: The BNPL provider runs a soft credit check to assess the customer’s credit history. This check doesn’t impact the customer’s credit score.
Repayment Plan Selection: If approved, the customer selects a repayment plan, which could include interest-free instalments or deferred payments.
BNPL Provider Pays the Merchant: The BNPL provider immediately pays the merchant the full transaction amount, minus a transaction fee.
Customer Repays the Loan: The customer repays the BNPL provider according to the agreed schedule.

Benefits of Buy Now, Pay Later for Businesses

Offering BNPL as a payment option can provide multiple advantages for merchants:

Increased Sales: BNPL can reduce purchase barriers, making it easier for customers to buy now and pay later, leading to higher conversion rates.
Attracts New Customers: BNPL appeals to budget-conscious customers and those looking for flexible payment options, expanding your customer base.
Enhanced Customer Experience: Flexible payment options improve the shopping experience, fostering customer satisfaction and loyalty.
Improved Conversion Rates: Merchants who offer BNPL typically see an increase in conversion rates and average basket sizes, as customers are more likely to complete their purchases when flexible payment options are available.
Lower Chargeback Risk: Since the BNPL provider pays the merchant upfront, the risk of chargebacks due to payment disputes is significantly reduced. The BNPL provider handles any chargeback claims, protecting the merchant from financial setbacks. However, if a chargeback involves product quality or delivery issues, it may still be passed back to the merchant for resolution.
Customer Retention: Happy customers tend to return for future purchases and even recommend your store to others, driving repeat business and customer loyalty.

Potential Drawbacks of Buy Now, Pay Later

While BNPL offers numerous benefits, it’s important to be aware of potential drawbacks:

Complex Integration: Implementing BNPL might require technical support from third-party providers, which can be complex and costly.
Provider Fees: BNPL providers typically charge a percentage-based fee per transaction, which can range between 2-8% of each sale, along with a fixed transaction fee. These fees can add up, particularly for high-volume merchants or those with low profit margins.
Increased Return Rates: Customers may use BNPL to ‘try before they buy’, leading to higher return rates. If you offer free returns, this could impact your profitability.
Consumer Debt Risk: BNPL can lead to customers accumulating debt if they fail to make timely payments, which could harm your brand’s reputation if customers struggle financially.
Regulatory Changes: As the UK government plans to regulate the BNPL market, new rules may affect providers and merchants, potentially leading to higher fees and fewer available options.Steps to Integrate Buy Now, Pay Later with Your Payment Gateway.

Steps to Integrate Buy Now, Pay Later with Your Payment Gateway

Select a BNPL Provider
Choose a BNPL provider that is compatible with your e-commerce platform and payment gateway. Consider providers like Klarna, Afterpay, or Affirm, depending on your business needs, customer demographics, and preferred fee structures.

Review Provider Documentation
Access the technical documentation provided by your chosen BNPL provider. This will include API references and integration guidelines that detail how to connect their system to your payment gateway.

Coordinate with Your Development Team
Share the provider’s documentation with your development team or hire a specialist if needed. They’ll use the API to integrate the BNPL option with your existing payment gateway, ensuring it fits seamlessly with your current payment setup.

Create a Testing Environment
Set up a sandbox or testing environment to simulate transactions and review the BNPL integration. Conduct thorough testing to identify any issues with functionality, user experience, or mobile compatibility before rolling out the feature to customers.

Optimise the User Experience
Work with your design and UX teams to make the BNPL option visible and user-friendly on your website. Include the BNPL option on product pages, the shopping cart, and the checkout page to ensure customers are aware of this payment method. Use clear, concise messaging to explain how BNPL works.

Ensure Mobile Compatibility
Verify that your BNPL integration is optimised for mobile devices, as a significant portion of e-commerce transactions occur via smartphones. Test the user interface and flow on various mobile devices to ensure a smooth experience.

Review Compliance and Security Standards
Ensure that your integration complies with all relevant security and compliance requirements, such as PCI DSS standards and data protection laws like GDPR. Coordinate with your BNPL provider to implement necessary security measures.

Monitor Performance and Make Adjustments
Once live, monitor key metrics such as conversion rates, average order values, and user feedback. Use these insights to make ongoing improvements to the integration. Regularly review performance with your BNPL provider and address any issues promptly.

How Much Does it Cost Businesses to Process Buy Now, Pay Later Payments?

Processing Buy Now, Pay Later (BNPL) payments involves several costs for businesses, primarily in the form of transaction fees and setup charges. BNPL providers typically charge a percentage-based fee on each transaction, which can range anywhere between 2% to 8% of the sale value, depending on the provider and the merchant’s agreement. In addition, there may be a fixed fee per transaction, usually a few pence per purchase. These costs can add up, particularly for high-volume merchants or those with slim profit margins. For businesses selling higher-ticket items, these fees may be more justifiable due to increased average order values. However, for lower-margin industries, the cost of BNPL transactions can significantly impact profitability.

Beyond transaction fees, some BNPL providers also charge an initial setup fee to integrate their payment options with your e-commerce platform, which can vary depending on the complexity of the integration and the provider’s terms. It’s crucial for merchants to thoroughly understand these costs and negotiate favourable terms to ensure that offering BNPL remains a profitable decision for their business.

Tips for Choosing a BNPL Payment Gateway for High-Risk Merchants

High-risk merchants, such as those in sectors like gaming, travel, or digital products, may face more challenges in finding a BNPL provider. Here are some tips for selecting the right BNPL provider:

Choose a Provider Specialising in High-Risk Businesses: Some BNPL providers have experience dealing with high-risk industries and can offer tailored solutions that address the unique needs of these businesses.
Evaluate Provider Fees and Risk Management: Compare the fees and risk management approaches of different providers. Select one with transparent fee structures and effective fraud prevention measures.
Review Compliance Requirements: High-risk merchants may be subject to stricter compliance regulations. Choose a provider that ensures compliance with industry-specific rules and standards.

Assess Provider Reputation and Customer Support: Pick a BNPL provider with strong customer support and a positive reputation. This ensures that both you and your customers receive timely assistance and a seamless payment experience.

Wrapping It Up

Incorporating Buy Now, Pay Later options into your payment gateway is a strategic move that can significantly enhance customer experience, drive higher sales, and improve conversion rates. However, it’s essential to weigh the benefits against the potential drawbacks, such as increased return rates and the fees associated with BNPL transactions. Finding the right provider, ensuring seamless integration, and maintaining compliance will help you make the most out of this payment solution. By offering flexible payment options, you can cater to diverse customer preferences and stay competitive in the evolving e-commerce landscape.

Whether you're a small business or a high-risk merchant, understanding the nuances of BNPL will help you make informed decisions that support your growth and profitability. With the right approach and careful planning, BNPL can be a valuable addition to your business strategy, providing you and your customers with a seamless and satisfying payment experience.

FAQs

What is BNPL?

Buy Now, Pay Later is a payment method that allows customers to purchase items and pay for them later or in installments, without having to pay the full amount upfront.

How does BNPL affect merchant fees?

Merchants typically pay a percentage-based fee on each BNPL transaction, usually between 2-8%, along with a fixed transaction fee. These fees can add up depending on the volume of BNPL transactions.

Does BNPL reduce chargeback risk?

Yes, in a BNPL transaction, the provider handles the financials. If a chargeback is issued due to non-payment by the customer, it is the provider’s responsibility. However, if the chargeback involves product quality or delivery issues, it may be passed onto the merchant.

Which BNPL providers are suitable for high-risk businesses?

Look for BNPL providers like Sezzle or Splitit, which are known to support high-risk sectors. Review their fee structures and compliance capabilities.

How do I integrate BNPL into my payment gateway?

Most BNPL providers offer APIs for easy integration. You may need your development team to work closely with the provider to ensure seamless integration and mobile optimisation.

Can BNPL affect my customer’s credit score?

While soft credit checks don’t impact credit scores, missing BNPL payments can be reported to credit agencies, potentially affecting a customer’s credit rating.

Is BNPL right for all types of businesses?

Not necessarily. Evaluate if your products or services align with BNPL features and whether your target audience would benefit from flexible payment options.

How can I promote BNPL options effectively?

Use email campaigns, social media promotions, and website banners to highlight BNPL options. Offer exclusive deals or discounts for customers who choose BNPL, making it more appealing.