Buy now pay later (BNPL) is a feature for ecommerce websites that allows customers to make multiple payments vs. having to pay everything upfront for their purchase. It is similar to layaway for brick-and-mortar stores in that a customer can make a purchase (taking the inventory), but instead of waiting for them to come back to pay and get the product, the BNPL company pays the retailer upfront and the product leaves inventory on a normal schedule.
Offering buy now, pay later can help convert more customers, grow basket size, and increase total revenue, but the option comes with higher fees and lower credit score customers. It can make sense if the profit from sales (with larger-than-normal orders and new customers) is higher than the increased fees you have to pay.
If adding buy now, pay later to a checkout process only switches customers from one payment option to another, it will erode profits due to the higher fees and may add more hassle for the retailer, because they’ll have to deal with additional payment provider systems for returns and disputes.
BNPL and credit card companies both pay the retailer in full following a sale, so there’s no risk if a consumer stops paying later or defaults on their credit card. BNPL makes cash flow smoother compared to credit cards, as the money is applied to your business bank account faster and you don’t face immediate pull backs during disputes like retailers do with credit cards.
Pro-tip: Check your affiliate program for sub-networks and BNPL providers by name. Some join affiliate programs directly or through monetization tools and may entice your own customers to click their affiliate link. If this happens, you now have to pay a commission on your own customer when they check out the next time in addition to the fees you pay for the service.
If you’re thinking about adding one or multiple BNPL options to your store, here’s how to figure out if doing so is a good way to grow your revenue and increase your customer base, or if BNPL is going to cause more trouble than it’s worth.
When Adding BNPL Payment Options Makes Sense
Adding BNPL payment options to your store makes sense when the feature will convert more customers and grow your sales enough to offset the higher costs. Don’t fall for the marketing hype from the BNPL companies, as the claims about increases in sales could be cherry-picked.
Third-party research gives you a more reliable estimate, like this one from the Journal of Retailing that shows customers increased total online spending by 6.4%, or this one from the Harvard Business Review where customer basket size grew 10%. The study from the Journal of Retailing also found that BNPL helped lower abandoned carts to boost conversion rates.
BNPL has higher fees than credit cards, so calculating if it makes sense financially is a good first step. Here’s an easy three-step process to do this:
- Calculate your gross margin.
- Determine your transaction fee for credit cards vs BNPL.
- Find your breakeven point.
Step 1: Calculate Your Gross Margin
If you don’t know the numbers offhand, you’ll find them on your business income (profit and loss) statement:
- Gross Margin (GM) = (Revenue – Cost of Goods Sold) / Revenue
Step 2: Determine the Percentage Cost Per Transaction
Credit cards charge you what’s called a Merchant Discount Rate (MDR) of 2% to 3% plus a fixed fee per transaction, and BNPL companies charge you an MDR between 3% and 6% plus a higher fixed fee. Check your contracts with existing vendors and those of the BNPL companies you’re considering.
For this guide, we’ll use these numbers below as an example to make it easy for you to plug in your own:
- Credit card fee = 3% + $0.10 per transaction
- BNPL fee = 6% + $0.30 per transaction
- Average transaction = $10
Don’t forget to convert the fixed fee per transaction into a percentage so that you can add it to the MDR by dividing the fixed fee by average transaction. That gives you the total fee per transaction. Here’s what it looks like:
- Credit card fee = 3% + $0.10 / $10 = 3% + 0.01% = 3.01% per transaction
- BNPL fee = 6% + $0.30 / $10 = 6% + 0.03% = 6.03% per transaction
Step 3: Find Your Breakeven Point
The formula for finding a breakeven point is:
- Breakeven = (BNPL fee – Credit Card fee) / (Gross Margin – BNPL fee)
The table below shows you the sales lift you’d need to break even for a few different gross margins. You can see that, as your gross margin decreases, you need a larger sales lift.
| Gross Margin | Credit Card Fee | BNPL Fee | Breakeven Sales Lift |
| 50% | 3.01% | 6.03% | 6.43% |
| 40% | 3.01% | 6.03% | 8.16% |
| 30% | 3.01% | 6.03% | 11.19% |
| 20% | 3.01% | 6.03% | 17.78% |
This means that if you have a high gross margin over 50%, then adding a buy now, pay later feature would likely make sense financially, given the 6.4% to 10% sales lifts noted in the Journal of Retailing and Harvard studies. If your gross margin is lower, try running an A/B test on a sample of your store’s traffic to see how big of a sales lift you get before rolling it out fully.
Other Benefits for BNPL
If BNPL makes sense for you financially, there are numerous benefits including:
- The cash from sales gets to your bank account in a matter of hours vs. a few days with credit cards, increasing your cash on hand more quickly.
- Keeping the cash during BNPL customer dispute transactions, whereas credit card companies would take back the charge until they resolve the dispute. You’d have to return the money in either case if you’re at fault in the dispute, but BNPL keeps cash flow more stable since the lenders don’t automatically take it back.
While it makes sense to add BNPL options to your store as long as the sales lift covers the higher fees, there are some potential drawbacks. We’ll explore those in the next section.
When BNPL Won’t Make Sense
BNPL won’t make sense when it’s unlikely to bring you new customers because they wouldn’t buy from you anyway, when it would only cause existing customers to switch buying options (not increasing their basket size or frequency), or when you can’t live with the other negatives including:
- Rolling reserve requirements
- Higher dispute rates
If your customers have mostly good credit or better, you may not see enough of a sales lift from BNPL to justify the higher fees. 71% of US consumers have a personal credit score above 670, but BNPL users, on average, have worse credit with over 77% having a score below 660.
You could even hurt your business by offering BNPL if existing customers or new ones that would have used a credit card decide to use BNPL instead, since you’re now paying a higher fee for the business you would have had regardless.
BNPL users also come with higher dispute rates (around 5%) vs. credit card users whose dispute rates are typically under 1%. You don’t lose the money unless you’re at fault in either case, and BNPL does let you keep the cash during the dispute process, but the 5X increase in dispute rate means you’ll likely spend a lot more time fighting claims.
If your business runs on thin working capital, BNPL might not make sense because of what’s called a “rolling reserve.” This is where some BNPL companies hold back a percentage of your sales for a period of time. In these cases, you may find yourself needing to take a working capital loan if margins are already thin, if your business is seasonal, or if the busy season has not started yet. Fortunately, National Funding offers working capital financing to small businesses across the country.
If the buy now, pay later company requires a 10% reserve for 90 days, you only get 90% of the sale today and wait 90 days for the rest. It creates a rolling tax that makes cash flow from BNPL always lower than sales. This can cause problems if you need cash flow to fund inventory, payroll, or other day-to-day expenses.
Whether or not offering BNPL to your business makes sense depends on various factors. As mentioned, these include your gross margin, the lift in sales potentially covering the higher fees, whether your product appeals to the type of customer that uses BNPL, and whether you can prevent existing customers from switching away from lower-fee payments.
National Funding does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only. You should consult your own tax, legal and accounting advisors.
