The Pros and Cons of Buy Now, Pay Later for Small Businesses

Buy now, pay later (BNPL) options are quickly becoming the preferred way to pay for many consumers, The Wall Street Journal reported that the share of online purchases completed in 2022 using BNPL rose by 14% compared to the previous year.

Businesses that offer BNPL often see an increase in sales. However, while many customers are attracted to BNPL, there are risks associated with this payment option that you should consider. Here are some key advantages and drawbacks to help you assess whether BNPL is right for your business.

Pro: It can increase sales

Small business owners can improve conversion rates and increase average order value to boost sales using BNPL. Data from Stripe show that businesses that accept BNPL services experienced a 27% incremental uplift in sales volume. Likewise, in a study of retailers by Affirm, businesses reported an average increase of 87% in average order value.

BNPL can lower cart abandonment rates by enticing casual shoppers to convert. It can inspire spontaneous purchases and help small businesses capitalize on more opportunities to close a sale. Ultimately, this translates to higher revenue — though not necessarily higher profits.

Con: It can cut into your bottom line

BNPL providers charge fees to merchants for offering their service. “Buy now, pay later transactions cost merchants anywhere from 1.5% to 7% of a customer’s total purchase amount, compared to 1% to 3% for most debit and credit cards,” wrote NerdWallet. This fee may not seem like much, but it can squeeze businesses that are already running tight margins.

There are ancillary costs to consider, too. BNPL encourages impulse purchases, which may result in higher returns or exchanges. Returns are expensive: It costs a company 66% of the price of a product to process a return. In some cases, BNPL could be costing your company money rather than boosting profits.

Pro: It can help acquire new customers

BNPL appeals to certain customer segments that some small businesses struggle to recruit. Stripe’s data show that more than 26% of millennials and nearly 11% of Generation Z shoppers have used BNPL to pay for a recent online purchase. These younger customers often don’t have a credit card; BNPL helps them get the things they need without one.

“We usually ask our retail clients not to think of us as a payment option, but as a new customer acquisition channel,” David Sykes, Head of Klarna North America, told NerdWallet.

[Read more: Afterpay Exec on How the Buy Now, Pay Later Disruptor Is Courting Small Businesses for Growth]

Con: It can put your business’s reputation at risk

Adding a third party into the mix when you process a sale can complicate matters. The way BNPL works is that the BNPL provider pays the merchant in full minus fees; the customer then repays the BNPL provider in installments. However, the BNPL provider is simply the facilitator. It’s up to the merchant to handle any customer service issues that may arise.

This is where things can get complicated. If the customer has a payment question, needs to process a return, or can no longer make payments, they’re likely to go straight to the merchant to get assistance. These scenarios can put your customer experience at risk if you’re not prepared. “You also should prepare for the fact that a customer who has a poor experience with the BNPL provider might inadvertently blame your business,” wrote American Express.

Should you offer BNPL?

There’s no simple answer to deciding whether or not to offer BNPL at your business. The retail industry has demonstrated that customers appreciate the flexibility of this payment method, and now, service professionals are also starting to see the value in BNPL. Dentists and mechanics, for instance, can accept BNPL for emergency services.

“Buy now, pay later can allow customers to get the service they need right away, which means the merchant can perform the service — and get paid for it — sooner,” wrote NerdWallet.

However, BNPL can create reputational risks and financial constraints. And the regulations around BNPL continue to evolve. Government agencies are exploring consumer protection rules to ensure consumers understand how the service works and their responsibility. This may help mitigate some of the reputational risk and lower return rates.

[Read more: How to Offer Financing and Layaway to Customers]

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