Editorial · August 8, 2021
Buy Now Pay Later: What Merchants Should Weigh
Buy now pay later lets a shopper split a purchase into a few smaller payments while the store is paid right away. Merchants weigh three things before adding it: what it costs per sale, how fast the money arrives, and how it changes what customers do.
This guide is for owners of small and mid-size stores. It uses what the providers themselves published as of early August 2021. Treat the numbers as the providers' own claims, not promises for your shop.
What buy now pay later means for a store
The most common offer is called pay in four. The customer pays the first part at checkout. The rest comes out of their account every two weeks. Afterpay describes it as four payments over six weeks. Klarna describes four interest free payments, with the rest collected automatically every two weeks after the first.
The store does not collect those later payments. The provider does. That is the main difference from layaway or store credit, where the store carries the wait.
Longer loans are also part of the market. Affirm, for example, says its merchant programs cover purchases from $50 up to $17,500 and more, with terms of up to 36 months and an option to offer 0% APR. Those programs suit big tickets more than a $40 cart.
The fees merchants compare
Fees are where providers differ most, and not all of them post a price. Klarna did. Its U.S. pricing page lists pay in four at a $0.30 transaction fee plus a variable fee of up to 5.99%. Its financing and in-store options list a variable fee of up to 3.29%.
Klarna also says its pricing includes card processing fees, so a store is charged once. That matters when you compare against a card sale, where the processing fee is a separate line.
Affirm's merchant FAQ lists "What is my fee?" as a question, but the answer is not shown on the page, so a store must ask for a quote. Afterpay's retailer page also gives no rate. Do not guess. Ask each provider for the full fee in writing, including any monthly charge, and work out the cost on your own average order.
A quick test helps. Take a $100 sale. At a 5.99% variable fee plus $0.30, the cost is $6.29. A card sale at a typical rate costs less, so the question is whether extra sales cover the gap.
When you get paid
Providers pitch fast payout as a main benefit. Klarna says the business "gets paid up front and in full." Afterpay says merchants are paid up front, within days of a sale, and receive daily settlement reports to reconcile orders.
Afterpay also says it takes on the risk, including chargebacks and fraud. Klarna says it takes care of the rest after the sale. If a customer stops paying, the provider bears that loss, not the store. Read the contract for exceptions, because refunds and disputes still run through the provider's system.
Ask how a refund works. If a shopper returns an item, find out how the provider adjusts the payments and whether the original fee is returned to you.
What it does to customer behavior
Providers publish upbeat numbers. Afterpay says its partners see a 20% increase in cart conversion on average and up to 40% higher average order value. Klarna says shoppers who split in four spend 45% more per order and shop 20% more often. Affirm cites an 85% rise in average order value as reported by businesses and a 20% repeat purchase rate.
These are marketing figures from the sellers of the service. Merchants choose which stores to count, and results vary by industry. A better test is your own: turn it on for a month and compare average order value, conversion and returns against the month before.
Customer mix may change too. Afterpay says 30% or more of its shoppers are new to a merchant's brand. Klarna says 44% of customers would have abandoned a purchase if four payments were not offered. New buyers can help, but check whether they return.
A market that is moving fast
On August 1, 2021, Square announced a deal to acquire Afterpay in an all stock transaction with an implied value of about $29 billion. The two companies said they expect it to close in the first quarter of next year, after the usual approvals.
Square said it plans to let even the smallest merchants offer buy now pay later at checkout. At the time of the announcement, Afterpay said it served more than 16 million consumers and nearly 100,000 merchants worldwide.
For a small store, the lesson is simple. Large payment companies are building this into the tools you may already use. Your checkout software or card processor may soon offer it, so check what it offers before you sign a separate contract.
A short checklist before you add it
Start with your margins. If your profit on a sale is thin, a fee near 6% may erase it. Next, get fee quotes from at least two providers and compare them on the same $100 order. Then confirm payout timing, refund handling and who owns fraud losses.
Finally, set a trial period and a number to beat. Decide in advance how much higher average order value or conversion would justify the fee. If the test misses, turn it off.
Sources
- Square, Inc., "Square, Inc. Announces Plans to Acquire Afterpay," August 1, 2021: squareup.com/ca/en/press/square-announces-plans-to-acquire-afterpay
- Afterpay, For Retailers page, capture of August 2, 2021: afterpay.com/for-retailers
- Klarna, Klarna for business and U.S. pricing pages, captures of August 2, 2021: klarna.com/us/business
- Affirm, business page and business FAQ, captures of August 4, 2021: affirm.com/business