What you should know before adding your business Buy now, pay later

“Buy now, pay later” is becoming common at major retailers like Target, Ikea and Macy’s. More and more small business owners allow their customers to pay in installments.

In fact, 55% of local businesses use “buy now, pay later” online and 5% offer it as an in-store payment option, according to a February survey by payments news website PYMNTS.com.

If you’re thinking about offering “buy now, pay later” for your small business, here’s what you need to know.


Buy Now, Pay Later involves three parties: the customer, the merchant, and the Buy Now, Pay Later provider. When a customer makes a purchase, the provider pays the merchant in full, minus the fees. Then the customer pays the provider back in installments.

“Buy now, pay later” transactions cost merchants between 1.5% and 7% of a customer’s total purchase amount, according to a 2021 briefing from the Federal Reserve Bank of Kansas City, compared to 1% to 3% for most debit and credit cards.

Suppose your customer splits a $400 purchase into four payments of $100 each. If you buy now and pay later, the provider charges a 5% fee for this service, pays you $380 upfront for that transaction, and collects the $400 from the customer over time.


Buy now, pay later costs more than other payment methods, but proponents of the service say it brings additional benefits.

“We typically ask our retail customers to consider us not as a payment option, but as a channel for acquiring new customers,” says David Sykes, Head of Klarna North America.

According to the PYMNTS.com survey, a higher percentage of Millennial and Gen Z shoppers are interested in using “buy now, pay later” compared to respondents of other generations, especially in luxury and specialty stores.

“If you’re a boutique, if you’re a craft business, if you’re a high-margin business (serving younger customers), it gives you an opportunity to have longer-term value for that customer,” says Julian Alcazar, a payments specialist at Federal Reserve Bank of Kansas City.

Buy now, pay later can also lead to more customers increasing their spending. That was the case with online marketplace for sustainable clothing Wearwell.

Wearwell began accepting Buy Now, Pay Later payments after receiving a grant from Klarna’s Small Business Impact Initiative in 2021. Erin Houston.

“It just reduces friction when someone adds something extra to their cart or decides on the purchase they really want,” says Houston.

Buy now, pay later isn’t just for retailers. Alcazar has seen a dentist and a mechanic accepting installment payments in recent years.

“When emergencies happen, they don’t happen on payday,” says Alcazar. Buy now, pay later can allow customers to get the service they need immediately, meaning the merchant can perform the service sooner and get paid for it.


In December, the Consumer Financial Protection Bureau launched an investigation into five “buy now, pay later” providers, including Klarna. Officials raised concerns about how much debt customers accumulate, how these companies use customer data, and whether they adequately disclose their fees and dispute resolution procedures.

Buy now, pay later Providers must adapt to potential regulations, says Brett Worick, vice president of BNPL and point-of-sale lending at First National Bank of Omaha. And as this payment method grows in popularity, providers must learn to manage the risks of this type of lending, he says. Buy now, pay later, which may mean their offerings will change.

“It’s almost like risk is the stuff we don’t even know about,” says Terri Bradford, senior payments specialist at the Federal Reserve Bank of Kansas City.


When shopping for a “buy now, pay later” vendor, Bradford says, “It’s not like there’s one size fits all.”

Buy now, pay later Apps aren’t your only options—banks also offer checkout financing. For example, last fall, the First National Bank of Omaha launched its own pay-for-buy service.

FNBO not only helps businesses to offer financing at the point of sale with payment terms of a few months, but also offers point-of-sale loans with terms of up to 10 years.

“It’s really just a new way of lending customers money in the more digital, faster age,” says Worick of FNBO.

Look for a “buy now, pay later” provider that integrates with your point-of-sale system. If you have a physical location, note that some providers are now available both in stores and online.

It’s also important to choose a provider that you trust to represent your business, as buyers don’t always distinguish between a merchant and the third-party provider they use for payments.

“Do the due diligence to find out who that partner is, what their terms are, and what they’re doing for the consumer,” says Bradford, “because those are your customers.”


This article was provided to The Associated Press by personal finance website NerdWallet. Rosalie Murphy is a writer at NerdWallet. Email: [email protected]


NerdWallet: What is buy now, pay later?

NerdWallet: 6 Buy Now, Pay Later apps in 2022

NerdWallet: What is a Point of Sale Loan?

NerdWallet: What is a POS system? Cost, Capabilities and Examples

“BNPL and the In-Store Opportunity: Why Merchants Need to Offer Payment Flexibility at the POS” was produced by PYMNTS.com and Zip. Researchers surveyed 2,025 US consumers on November 23 and 24, 2021 for their opinion of BNPL as a short-term lending method. Respondents asked about their use of BNPL as a payment option, how they view merchants offering BNPL, and how availability affects their purchasing and payment decisions.

PYMNTS.com and Zip. (February 2022.) “BNPL and the In-Store Opportunity: Why Merchants Need to Offer Payment Flexibility at the POS.”

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