Buy now, pay later (BNPL) is fast changing both retail and e-commerce purchases in Australia.
Services like Afterpay, Zip, Humm, and PayPal Pay in 4 have become mainstream channels that appeal particularly to younger generations who want flexibility without relying on the old plastic of credit cards. This model has become very popular for its simplicity, fast approvals, and wide range of fashion, electronics, homewares, and lifestyle retailers.
Let’s take a deeper dive into how BNPL works and what considerations you must keep in mind.
How does Buy Now, Pay Later work?
Buy now, pay later services give customers the option to buy something immediately and then make repayments over several instalments, usually without incurring interest. In this way, BNPL providers don’t make money by charging interest to customers, but rather generate revenue through merchant fees and late payment fees.
A typical BNPL transaction works as follows: At checkout, your customer chooses a BNPL option. The BNPL provider pays the merchant right away, sometimes in just one to two business days, while customers pay the BNPL provider in instalments according to their preferred option of several weeks or months.
Almost every small to large business is adapting these services to make it easier for their customers to make purchases without waiting. However, BNPL is both an opportunity and a risk. When evaluating buy now, pay later services, small businesses need to weigh both the potential sales boost and the platform fees to determine whether that model fits their margins and the preferences of their customers.
Pros of BNPL Services
Better Conversion Rates and Less Cart Abandonment
One of the greatest strengths of BNPL is that it helps your purchasers to go through the sales they were putting off due to tight budgets. Providing payment instalment options minimises the psychological friction and makes it seem easier for people to buy higher-priced goods. Small businesses providing BNPL usually experience increased checkouts as compared to the regular stores, particularly online.
Increased Average Order Value (AOV)
Research studies around retail markets have found that basket sizes increase by 20 to 40 % for small businesses offering BNPL services. This fact can bring a great boost in revenue for small companies that sell mid-range to high-end products.
Fast and Predictable Cash Flow
Despite the fact that users pay over time, merchants get the whole amount shortly after the transaction. This helps the small businesses to maintain their cash flows and use them for inventory funding or any overhead expenses. BNPL also mitigated the repayment risk by assuming complete responsibility for instalment collection.
Accessibility to Younger and Budget-Limited Shoppers
A large percentage of Millennials and Gen Zs appreciate the instalment options for payments and want to steer clear of traditional credit. Providing BNPL as a payment method appeals to such consumers on a large scale and turns them into loyal buyers.
Cons of BNPL Services
High Merchant Fees
This is one of the biggest downsides of BNPL services. Although every BNPL service charges a different merchant fee, it usually ranges between 3 and 6 per cent, which is much more than standard credit card and EFTPOS charges. These fees can be especially burdensome if your business has a thin profit margin.
Return and Refund Complications
Higher return product categories like apparel, footwear, and beauty can cause businesses a greater loss because even if the product is returned, the BNPL service provider will still charge the merchant fee. This makes a business lose not only the sale but part of the revenue as well.
Operational and Customer Service Challenges
No business experiences smooth sales without any hitches. The payment flows get even more complicated with BNPL for refund workflows, partial-return scenarios, customer questions about instalments, and dispute handling. Therefore, your staff must be trained to tackle instalment-related issues, and outdated POS or website systems may require further integration support.
Brand and Ethical Concerns
While BNPL provides shopping freedom for shoppers, it can also lead to over-indulgence. The Australian Securities and Investments Commission (ASIC) reports have found that a lot of BNPL users grapple with late fees or repayment stress. And while businesses aren’t responsible for collecting repayments, the customers might feel a financial burden toward the brand. This can pose potential effects on trust, especially for small businesses.
Tips to Manage Buy Now, Pay Later Efficiently
Although risks can sound scary, as a small business, you can gain more benefits from BNPL by using smart management practices as follows:
Calculate your Margins Before Signing Up: Always calculate your profit for each product and compare it to the BNPL fees. If your average margin is low, BNPL might not be suitable for your business unless it significantly increases the AOV.
Compare BNPL Services: Every provider has their own fees, settlement times, and supported platforms. You must do proper research before selecting the most compatible one for your business.
Monitor Return Rates Closely: If your business is in a high-return category like fashion or beauty, you need to pay close attention to whether merchant fees are eating too much into your profit margins.
Monitor the Regulatory Landscape: The regulation of BNPL is rapidly developing in Australia. Keep an eye on announcements from ASIC and the Treasury to be nimble if there are changes in compliance requirements.
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Buy now, pay later services can bring a lot of value for small businesses by improving conversion rate and higher average order values. But disadvantages may outweigh advantages for some businesses when their profits fall short of merchant fees. Therefore, small businesses need to decide if a lift in sales and customer loyalty is worth the merchant fees and a decline in profit margins.
