How BNPL Works?

Remember Oleson’s Mercantile in Little House on the Prairie?  Local shoppers had the flexibility of asking Harriet or Nels Oleson if they could put some cash down now and pay the rest later.

Similar to the trust relationship of a small town local store that would allow a regular customer to put an amount of the purchase on the store credit, BNPL automates this option in the cloud.

Trust is substituted by smart, real-time fraud and credit risk algorithms.

BNPL is associated with an online experience specifically designed to service expeditious, one-time purchases with real-time approval. Usually interest-free plans, with late fees charged for late payments  

BNPL providers usually charge merchants an MDR (Merchant Discount Rate)

  • Openpay: allows merchants to buy down the monthly consumer fees
  • Afterpay: 4.17% fee on transactions
  • Affirm: 2-3% per transaction
  • Klarna: Up to $0.30 + 5.99% per transaction
  • Sezzle: standard processing fee is 6% plus $0.30 per transaction

Typically these are 0% APR and no hidden fees. The transaction is simple and can be painless. Depending on the ticket size, the consumer can pay in 4 payments (X) or stretch out larger purchases to 12 or 18 months (Y).

Smaller Purchases: Pay in X

  • The consumer either sees a BNPL option at check out or can prequalify for credit on the BNPL app.
  • Consumer either logs in or creates an account, BNPL provider completes a real-time credit check usually using alternative data scored algorithmically.
  • BNPL vendor pays the merchant in full
  • Consumer pays the agreed amount to BNPL provider
  • If consumer fails to pay installments, they are potentially subject to late fees, removal from the platform and their credit may be impacted

High ACV: Pay in Y

  • The consumer either sees a BNPL option at check out or can prequalify for credit on the BNPL app.
  • BNPL vendor pays the merchant in full
  • Consumer selects payment plan, generally ranging from 6 months – 3 years
  • BNPL provider pays total purchase price upfront to the merchant and consumer pays a specified amount to BNPL provider
  • Loan is either securitized or maintained on the BNPL providers balance sheet throughout the length of the loan
  • If consumer fails to pay installments, they are potentially subject to late fees, removal from the platform and their credit may be impacted

BNPL has accelerated its position by offering white label BNPL enablement solutions. From prequalification widgets connecting merchants to lenders to fully bundled underwriting and disbursement solutions. Retailers can control and configure their own solution that can help prevent redirects and extra logins and create a more seamless user experience.