Retailers and businesses look forward to the holiday season for the surge in traffic and sales. To make the most of it, they invest in various marketing strategies and promotional campaigns, such as gift bundles, discounts, or gift coupons.
However, aside from these, many companies also adopt various payment methods to encourage impulse purchases, including the Buy Now, Pay Later (BNPL) scheme.
So, in this article, we will explore BNPL—what it is, how it works, and how you can take advantage of it this holiday season.
Let’s dive in.
What is Buy Now, Pay Later (BNPL)?
Buy Now, Pay Later (BNPL) is a short-term financing option offered by services like Affirm, Klarna, and Afterpay.
Basically, customers choose the BNPL option at checkout, receive instant approval, and then pay the total cost in four equal, biweekly installments. Meanwhile, BNPL providers pay small and medium-sized businesses (SMBs) the full purchase amount upfront, minus a small fee.
In other words, BNPL works like a modern installment loan, with providers taking on the credit risk and handling the collection of payments from customers.
Why BNPL Matters During the Holiday Season
A growing number of businesses are adopting BNPL financing to boost their sales, especially during the holiday season. This approach is practical for the following reasons:
Rising Consumer Demand for Flexible Payments
Shopping during the holidays can be challenging – not only because items sell out quickly, but also due to financial constraints. Many shoppers feel pressured to buy gifts despite inflation and rising costs.
BNPL helps address this challenge by allowing shoppers to manage their cash flow more effectively, splitting large holiday shopping bills into smaller, zero-interest installments. As a result, many customers prefer to shop with businesses that offer BNPL payment options.
Competitive Advantage for SMBs
Offering BNPL at checkout has been proven to increase conversion rates, as shoppers are less likely to abandon their carts when the full payment isn’t required upfront.
Studies show that Millennials and Gen Z consumers are more likely to shop at stores that offer BNPL.
Therefore, if small and medium-sized businesses (SMBs) provide BNPL options like large retailers do, they can attract more customers who prefer flexible payment plans.
Providing these options helps SMBs compete on equal footing and increase sales by appealing to budget-conscious shoppers, just as many big companies do.
Boost in Average Order Value (AOV)
Like other installment plans, BNPL reduces the perceived cost of a purchase.
Breaking down a large payment into four smaller, interest-free installments makes shopping feel more manageable than paying the full amount upfront.
Hence, consumers feel they have more room in their budget, prompting them to add more items to their carts without feeling guilty.
Benefits of Offering BNPL for US SMBs
It’s a given for many large retailers to offer BNPL at checkout.
However, American SMBs can also benefit from adopting this strategic payment option to boost their sales – especially during the holiday season:
#1. Increased Sales Conversion
Customers often abandon their carts when faced with a substantial total up front. While large retailers can afford occasional drop-offs, this hesitation can be costly for small businesses.
This is where Buy Now, Pay Later options can make a difference.
Data shows that BNPL options can lead to a 30% to 50% increase in conversions for e-commerce stores. This is because customers are more likely to complete their purchases when they can pay smaller amounts over time instead of covering the full cost upfront.
#2. Attracting New Customer Segments
Millennials and Gen Z consumers are highly selective about the brands they support. They consider factors like company values, sourcing practices, and even payment methods.
Since they are digital natives, these customer groups are active online shoppers but tend to be skeptical of traditional credit cards. Instead of dealing with complex interest rates, they prefer straightforward installment plans like BNPL.
Because of this, they are more likely to support businesses that provide not only quality products, but also flexible payment options.
#3. Better Cash Flow Management
BNPL providers pay merchants upfront.
While customers make interest-free installment payments over several weeks or months, merchants receive the full amount almost immediately. This means SMBs don’t have to assume the credit risk associated with customer repayments.
If a customer defaults on their installments, the BNPL provider absorbs the loss, protecting the SMB’s bottom line.
#4. Building Customer Loyalty and Repeat Purchases
More importantly, BNPL shows your customers that you care about their needs.
By offering a seamless, interest-free payment option, you help them manage their holiday budgets more comfortably. It creates a strong positive association with your brand, as customers perceive your business as accommodating and supportive of their financial needs.
When done right and consistently, this builds trust and can turn one-time holiday shoppers into loyal, long-term customers.
Risks and Challenges to Consider
While BNPL offers undeniable benefits, there are also several factors to consider before implementing this seasonal sales strategy, such as:
Transaction Fees and Processing Costs
You may ask, if BNPL offers so many benefits, why don’t most small businesses provide it?
One reason is the higher Merchant Discount Rate (MDR) charged by BNPL providers compared to traditional credit card processors.
For example, BNPL providers like Affirm or Klarna charge fees ranging from 1.5% to 7% of the transaction value, whereas standard credit card fees typically range from only 1% to 3%.
Increased Return Rates
BNPL encourages customers to shop more freely, often leading to impulse purchases and returns since they don’t feel the immediate impact of paying upfront.
Because of this, customers are more likely to buy items they’re uncertain about – or can’t truly afford – because they only need to pay a small fraction of the total cost upfront.
This often leads to a higher rate of buyer’s remorse and an increase in product returns.
Customer Default Risks
Aside from buyer’s remorse and product returns, BNPL can also result in customer defaults or missed payments.
However, this is not a major concern for merchants, as BNPL providers assume the credit risk. If a customer fails to make their scheduled payments, the business won’t be affected since the amount isn’t deducted from their sales.
Meanwhile, BNPL providers handle credit checks and implement “low-and-grow” strategies to help customers repay their balances. This allows SMBs to focus on selling and serving their customers without worrying about repayment issues.
Operational Adjustments Required
Integrating a BNPL system requires SMBs to make several internal adjustments, including:
- Customer Service and Staff Training – While the BNPL provider manages credit risk and collections, customers often reach out to the merchant with questions. Therefore, it’s important to train your staff on payment schedules, refund processes, and how to handle technical issues.
- Refund Reconciliation – Additionally, the refund process becomes more complex, as it’s no longer a simple reversal of a single payment due to the fees involved. This means you’ll need to coordinate with the BNPL provider to accurately reconcile funds across multiple installment payments.
How to Prepare Your Business for BNPL This Holiday Season
Despite several BNPL integration challenges, it still offers many advantages for SMBs looking to boost their sales this holiday season.
So, if you’re considering adding this to your current digital payment options, here are a few things to keep in mind:
Choose the Right BNPL Provider
It’s important to choose which BNPL provider to go with. But, how is this done? For starters, you should consider:
- Fees and Pricing – BNPL providers typically charge Merchant Discount Rates (MDRs) ranging from 3% to 7% of the transaction value. Therefore, negotiate the best possible rate based on your projected holiday sales volume. Also, make sure you understand all associated fees, including refund processing costs, so you can accurately forecast your profit margins.
- Customer Experience and AOV – You should also choose a provider that aligns with your product mix. For example, Affirm is ideal for high-ticket items priced at $1,000 or more, as it offers longer-term, interest-bearing loans suited for larger purchases. Meanwhile, Afterpay and Klarna are better suited for short-term, four-installment, zero-interest plans, as they attract Gen Z shoppers and Millennials.
- Integration and Support – Lastly, choose a BNPL provider that integrates seamlessly with your existing e-commerce platform. A smooth checkout experience and reliable customer support are essential for maintaining high conversion rates and minimizing operational issues during the holiday season.
Update Your Checkout Experience
With the help of your web developer, strategically place BNPL options throughout holiday shopping trends. Display the BNPL payment breakdown directly below the retail price on each product page to make it more visible and appealing to customers.
For example, instead of showing only the full price, display messages like “Only $25/month with Affirm” or “Four interest-free payments of $50 with Afterpay.”
Moreover, make sure BNPL is displayed as a primary payment option alongside traditional methods like credit cards and PayPal. This ensures customers can complete their purchases smoothly without leaving your site.
Train Your Staff and Support Teams
As mentioned earlier, adopting BNPL requires internal training. Your staff should be familiar with the exact processes, including:
- When the customer receives their product;
- When the merchant is paid by the BNPL provider; and
- Who is responsible for collections and late fees.
More importantly, your staff should understand the specific refund policy for BNPL purchases. Make sure they clearly explain to customers that refunds are processed by the BNPL provider not directly by your store.
You can also create an FAQ section for common BNPL questions, such as “Why was my payment declined?” or “When will I receive my next bill?” When done properly, these measures help manage customer expectations and prevent confusion.
Track and Optimise Performance
After setting up and launching, you must actively monitor your BNPL performance. Here are some key metrics to track:
- Conversion Rate (CVR) – Measure the percentage of site visitors who complete a purchase using BNPL compared to other payment methods. A higher conversion rate may indicate that BNPL is effective in reducing hesitation at checkout.
- Average Order Value (AOV) – Compare the average order value (AOV) of BNPL purchases with non-BNPL purchases. This determines whether BNPL encourages customers to buy higher-ticket items or add more to their carts.
- Return and Refund Rate – Closely monitor the return rate for BNPL orders. If it is significantly higher, this may indicate increased impulse buying or buyer’s remorse, signaling a need for product page adjustments or clearer messaging.
Real-World Use Cases: BNPL in Action for SMBs
Fashion retailers like Macy’s offer BNPL payment options, resulting in repeat purchase rates increasing by up to 20%.
Similarly, if you run a fashion store, you can offer shoppers the option to pay using BNPL services like Afterpay or Klarna. A good starting point is to introduce it during the Black Friday weekend, when customers are more likely to add multiple items to qualify for free shipping.
By prominently featuring Afterpay’s “Pay in 4” option, you can achieve higher conversion rates and/or increase the number of items per order, similar to the results reported by Macy’s and other retailers.
On the other hand, fitness equipment retailers like Dick’s Sporting Goods offer BNPL services for mid-to-high-priced items, such as premium treadmills and smart bikes. Thus, if you sell premium products or services, you can provide BNPL options like Affirm, which offer long-term financing.
Frequently Asked Questions (FAQs)
Here are some frequently asked questions (FAQs) about BNPL for small businesses.
#1. Is BNPL Safe for Small Businesses?
Yes! BNPL is generally safe for SMBs, provided you manage the costs. BNPL providers assume nearly all financial risks, as they pay SMBs the full purchase price upfront.
The only factor to consider is your profit margin, as BNPL fees may be higher than those charged by credit cards.
#2. How Quickly Do Businesses Get Paid?
Small businesses receive payments quickly, almost as if they were standard credit card transactions. Most BNPL providers pay the merchant the full purchase amount upfront, minus a pre-agreed transaction fee.
#3. What Fees Are Involved?
The fee structure typically includes an MDR, which is a percentage of the total transaction value. There may also be a fixed transaction fee, a small flat fee charged per transaction.
Businesses usually treat these BNL merchant fees as a marketing expense, offset by the higher conversion rates and increased average order value.
#4. Do I Need To Change My POS System?
It depends on your existing setup, although a complete system overhaul is usually not necessary.
If you use a popular e-commerce platform like Shopify, integrating BNPL is usually easy with a pre-built app or plugin. For physical stores, it depends on whether your systems are modern or outdated.
Providers like Afterpay offer direct integrations with modern POS systems, allowing customers to scan a QR code generated by the POS to complete payments using your existing terminal hardware.
On the other hand, if you have an older or custom POS, you may need a minor software upgrade or an API integration to connect your checkout system with the BNPL provider.
#5. Is BNPL Suitable For Service-Based Businesses?
Absolutely! BNPL is ideal for many service-based businesses, as it allows clients to pay in installments, eliminating the upfront cost barrier.
For example, many healthcare and dental providers offer BNPL for elective procedures, dental work, or veterinary care. Similarly, travel agencies let customers split the cost of flights, hotels, or vacation packages.
Conclusion
Buy Now, Pay Later is a powerful tool that benefits both merchants and customers: merchants can boost sales while getting paid instantly, and customers can shop more without worrying about immediate payment.
This creates a win-win situation for both parties, especially during the holiday season when customers want to treat their loved ones without straining their budgets.
However, businesses must carefully choose the right provider, taking into account transaction fees, staff training, and other operational factors. When planned and executed properly, BNPL can be highly beneficial during the upcoming holiday rush.
So, what are you waiting for? It’s time to capture more holiday sales by offering a Buy Now, Pay Later option sooner rather than later.
For assistance with implementation, call us today or request a callback so our web developers or marketing specialists can guide you.
Syrine studies law while working as a content writer. Outside of writing and studying, she tutors, plans events, and browses social media. In 2021, she published Stellar Thoughts.
