Buy Now, Pay Later (BNPL): How It Works + Merchant Guide

What is Buy Now Pay Later?

Buy Now, Pay Later (BNPL) is a payment solution that allows cardholders to purchase goods or services immediately while deferring full payment to a later date, typically through a series of installments. Merchants receive the full purchase price from the BNPL provider upfront, while the BNPL provider assumes responsibility for collecting payment from the consumer. Some of the most popular BNPL providers include PayPal, Afterpay, Affirm, and Klarna.

How Does BNPL Work?

BNPL payments involve a three-party structure, comprising the merchant, the BNPL provider, and the cardholder. In theory, each party benefits: the merchant expands their reach to wider demographics, the cardholder gains payment flexibility, and the BNPL provider collects the price of the product, plus service fees (typically 2-8%) from the merchant, and sometimes interest from the cardholder. These additional fees allow the provider to both offset the risk of default and generate profit.

To offer BNPL, merchants must establish an account with their chosen provider and incorporate BNPL payment options into their existing e-commerce platform or payment gateway. The BNPL transaction process is designed to be as seamless as possible, minimizing friction at checkout:

A cardholder selects a BNPL option during checkout.
The BNPL provider instantly conducts an eligibility check, typically using a “soft” credit inquiry.
Upon approval, the cardholder agrees to the payment plan.
The transaction completes and the merchant delivers goods/services as normal
The merchant receives the full transaction value (minus service fees) shortly after purchase.
The BNPL provider assumes responsibility for collecting installments from the customer according to the agreed schedule.

BNPL Benefits and Challenges for Merchants

BNPL can significantly increase revenue for merchants who implement it effectively, but may present difficulties for those with particularly tight margins, substandard delivery practices, or poor chargeback management capabilities. Let’s consider the benefits and challenges in turn so you can decide whether a BNPL partnership is the right choice for your business.

BNPL: Merchant Benefits

Increased Average Order Value (AOV): When customers can spread the cost of their purchases over several installments, the psychological hurdle of a large upfront payment is significantly diminished, enabling them to spend more. A recent survey of retailers using Affirm reported an average AOV increase of 85%.

Higher Conversion Rates: BNPL’s flexible payment options can be a deciding factor for customers who are on the fence, leading to a notable decrease in abandoned carts and a corresponding rise in completed transactions. Paypal reports that by addressing payment friction and budget concerns, BNPL can reduce cart abandonment by 20-30% on average.

Expanded Market Reach: BNPL services are particularly popular among younger consumer demographics, such as Millennials and Generation Z, along with lower-income customers, and those without traditional credit facilities. BNPL integration may improve your access to these lucrative markets.

BNPL: Merchant Challenges

Higher Transaction Fees: BNPL providers charge higher service rates than those associated with standard credit or debit card processing; these typically range from between 2% and 8% of the transaction value, along with a fixed fee. These costs can significantly impact profit margins, particularly for businesses operating with narrow margins or selling low-value items.

Provider Dependency: Merchants who offer BNPL become reliant on the operational stability, technological performance, and customer service quality of their chosen provider. Any downtime, system errors, or poor customer service from the BNPL provider can negatively impact the merchant’s sales process and customer satisfaction.

Increased Returns: The ease of purchase and deferred payments afforded by BNPL can encourage impulse buying, leading to a higher rate of returns. Besides losing the price of the returned goods, this also incurs the operational costs of processing returns, restocking, and potentially the loss of the non-refundable portion of the BNPL transaction fee.

BNPL Chargebacks

While BNPL providers sometimes assume liability for chargebacks, the sector is still relatively underregulated and few rules hold true for all vendors. Moreover, due to a combination of limited credit checks and high numbers of impulse purchases, BNPL is plagued by incredibly high rates of both true and friendly fraud. For this reason, it’s essential to carefully study any dispute-related terms and conditions before partnering with a BNPL vendor.

While true fraud is usually covered by the vendor, most BNPL providers still hold merchants accountable for disputes relating to delivery, and the quality of goods and services. These disputes can be more complicated than those arising from traditional payment methods because of the additional party involved – the BNPL provider – who sometimes acts as an intermediary between customer and merchant, combining the roles of acquirer and issuer in a typically dispute scenario.

Depending on the provider, merchants who lose BNPL disputes may be forced to refund the price of the entire transaction, in addition to any interest accumulated. In other cases, the merchant may simply be strongly encouraged to offer a refund, risking account closure if they refuse.

Furthermore, each BNPL provider maintains its own distinct procedures, evidence requirements, response timelines, and merchant portals, requiring merchants to develop separate internal workflows for each provider they offer. The typical flow of a BNPL dispute is as follows:

Customer Initiates Dispute: The process begins when a customer encounters an issue with their purchase or the BNPL service itself. They will typically raise a dispute directly with their BNPL provider. In some instances, particularly if a credit or debit card was used to fund the BNPL installments, the customer might also initiate a chargeback with their issuer.
BNPL Provider Notifies Merchant: Upon receiving a dispute from a customer, the BNPL provider will formally notify the merchant. This notification usually includes details of the customer’s claim and a request for the merchant to provide information, documentation, or evidence to contest the dispute.
Investigation by BNPL Provider: The BNPL provider then undertakes an investigation into the dispute. This involves reviewing the information and evidence submitted by both the customer and the merchant. The provider assesses the validity of the claim based on its policies and the evidence at hand.
Decision and Liability Assignment: Following the investigation, the BNPL provider makes a formal decision on the dispute. If the dispute is upheld, the merchant is often debited for the full transaction amount. If the merchant wins the dispute, any funds previously withheld or debited are returned to the merchant.

How Justt Addresses BNPL Chargeback Challenges

Justt’s AI-powered solution navigates the complexities of BNPL chargebacks with end-to-end automation that seamlessly adapts to each provider’s requirements. By drawing from +500 sources – including merchant systems, PSPs, and third-party data – Justt automatically constructs compelling evidence packages that address the nuances of unique cases, individual vendor preferences, and the stringent timelines of BNPL disputes.

Meanwhile, Justt’s continuous machine learning ensures that dispute strategies evolve based on outcomes, adapting to the changing landscape of BNPL disputes and provider requirements. This proactive approach means that merchants can confidently offer multiple BNPL options without the administrative burden of managing diverse dispute processes. Instead, they can enjoy BNPL’s sales benefits with minimal operational complexity and maximal revenue preserved.