What’s a good way to yield top money on your e-commerce or service platform nowadays? It’s to have your customers not pay you immediately. Thus, Buy Now, Pay Later has become the fastest-growing segment in consumer finance. Shoppers want to have it. Merchants want them to have it. And BNPL providers like Klarna (B2C), Afterpay (B2C) or Biller (B2B) are eager to provide it. But what exactly makes Buy Now, Pay Later so popular? And should your business strive for its own BNPL solution?
In this article, we detail…
- What the core advantages of Buy Now, Pay Later are
- What the 3 major challenges are, when you build your own Buy Now Pay Later solution
- How to overcome those challenges with the CoreWallet framework
Now, to question 1…
What Buy Now, Pay Later Does – And Why Customers Want It
Buy Now, Pay Later is not a new concept. But in today’s e-commerce landscape, it is a fresh concept.
Buy Now, Pay Later methods upon checkout allow customers to buy something online, but pay for it long after delivery. Thus, it is a novel, online variant of purchase on account, for short-term financing of goods. The customer owes the BNPL provider the purchase amount, due at a future date (e.g. after 3 months).
That’s only the basic principle, of course. In most cases, the buyer pays the full amount once the credit period expires. Yet, depending on the BNPL provider, customers might also have to pay a certain partial amount during the checkout and then pay the remaining amount later. Additionally, some Buy Now, Pay Later providers allow payment in multiple installments. In that, they resemble traditional bank-driven installment payments. However, no traditional banking institutions have to be involved there. Besides, some BNPL companies even refrain from charging interest rates – a practice that banks still adhere to.
The Pros of BNPL Systems
In BNPL, customers appreciate:
- The financial flexibility to get goods right when they need them and pay the bill later or in installments
- The improved, frictionless customer experience, as customers don’t need to involve their banks for installment payments or credit cards
- The easier onboarding and fewer restrictions, when compared to bank accounts or credit cards
Merchants, who offer BNPL, benefit from:
- Fewer cart abandonments due to reduced friction (lesser bank involvement, easier access to a payment option)
- Better conversion rates as customers buy on first contact – instead of bookmarking and forgetting about the product
- Broader customer base / more revenue as even higher-priced offers become more affordable for more people
The Cons of BNPL Systems
Of course, BNPL systems don’t present a silver bullet for every payment issue. Many finance industry professionals have pointed out the flaws of BNPL – or outright criticized the principle as such – stating:
- Merchants may be targeted with fraudulent transactions, if the BNPL provider neglects efficient anti-risk and anti-fraud measures, allowing criminals to order goods they never pay for
- BNPL may encourage customers to spend money they don’t have, which can lead to liabilities exceeding the assets and low credit scores
- Some BNPL providers even encourage overspending by customers, as they make most of their money through dunning charges
Now, the question ist: Could you build a solution that avoids the flaws above?
Sure, but there are a few things to keep in mind while doing so.
Building Your Own BNPL Product: 3 Challenges
You can of course decide to integrate a turnkey BNPL solution into your platform. However, it brings some disadvantages: it ties your business to a certain 3rd party provider. Dependencies impair your flexibility and limit your options for innovation or expansion to new markets. If you search for a Buy Now Pay Later solution, make sure that it closely matches your business model. And that it leaves room for adjustments.
As a business owner, you’d probably want to enact full control over the financial technology on your platform. Consequently, you may also aim at creating a custom payment system (and there are good reasons for this). And you might plan to integrate Buy Now, Pay Later functionalities while you’re at it. Yet, raising everything from the ground up binds time, resources and workforce. Thus, the easiest way to create a BNPL solution would be to rely on a payment system framework that already comes with pre-built modules for common features (as our CoreWallet does).
In any case, there are three major challenges when building a BNPL product:
Making Money (= Getting Paid)
Offering a Buy Now, Pay Later business means advancing money for customers’ payments. And if you have a marketplace business, merchants are receiving their money as a pre-payment from you. That means, to start a BNPL system, your business must have access to enough financial resources and the appropriate licenses your country’s regulators demand from you.
With that in place, you have to think about how to make your BNPL solution profitable. It starts with incorporating the BNPL checkout flow seamlessly into your payment architecture. Your payment system must be able to handle time-delayed transactions and handle negative balances of user accounts. Refunding and partial refunding of a BNPL payment is also a big topic here.
Once that’s set, you can think about how you want to gain a profit from your Buy Now Pay Later service. Most often, we see 3 basic options in place:
- Merchant Usage Fee: This is very much the standard model, prefered by Payment Service Providers of all kinds. Here, the merchants of a platform pay a fee to the BNPL provider for offering customers this payment option. Typically, the fee is a certain percentage of each transaction, plus sometimes a flat fee on top. BNPL providers invoice it often en-bloc at the end of the month. Fees tend to lie between 2% and 8%, which would sometimes surpass typical Credit Card transaction fees.
- Interest: Customers will pay the purchase amount + a percentage in interest, once full or partial payment is due. Yet, handling accounts that bear interest requires a full banking license.
- Dunning Charges: Customers that can’t meet outstanding liabilities will be charged a fee. This model has been criticized for BNPL companies that use it as their main source of profit, which it shouldn’t be.
How to Do It With CoreWallet
The CoreWallet framework comes with a feature-rich payment module which can conduct various types of payment actions. Payment actions can trigger different forms of transactions and can be configured and adjusted. This grants you maximum flexibility in your system.
CoreWallet can implement BNPL functionalities in two fundamental ways. But each includes a multitude of options for you to tweak the outcome according to your specific business model.
1. Wallet-Based BNPL
The core of CoreWallet lies in its electronic wallet feature. Customers and merchants can have their own wallet accounts with configurable limits and usage rights. To set up a BNPL system in this environment, you simply would allow customer wallet accounts to hold negative balances – under certain conditions.
Thus, when the customer chooses the BNPL option during checkout, the amount for the purchase would get subtracted from their wallet account balance. On the payment due date, the negative balance would have to be offset – via direct debit or credit card charge, for instance. CoreWallet handles this as a simple payment action that’s scheduled for a future date – and the system can be configured to send notifications once payment is due or overdue.
Refunds are also easy to manage in this system, as the refund amount can just be returned from the merchant’s to the customer’s wallet account. The software can also be set up to handle the complexity of partial refunds and refunds for installment payments.
2. I.O.U-Based BNPL
Instead of giving each customer their own wallets, it’s also possible to record the outstanding balance as a kind of digital I.O.U. A database can be set up to store those, which communicates with the CoreWallet-based system. CoreWallet would then be configured to create an I.O.U. at checkout – every time a customer goes with the BNPL option. Besides, it would also schedule a future payment action at the due date, as described above.
Special Case:f BNPL in Installments
In both scenarios, it’s possible to adjust and expand CoreWallet to allow installment payments as well. The system would then create multiple payment actions to be conducted at different, subsequent dates.
Handling Payment Failure (= Not Getting Paid)
Now we know how you get paid in your BNPL system. But what if you don’t get paid – what if the scheduled customer payment fails? Sending out dunning letters after the first default might not prove the best strategy. The inability to pay is not to be equated with an unwillingness to pay.
Instead, it’s better to implement automation and payment orchestration to increase the likeability of payments being completed.
How to Do It With CoreWallet
In CoreWallet, you can set up payment processing to best fit your business model. CoreWallet comes with some pre-integrated basic payment methods. Yet, you can easily integrate more, including popular, local ways of payment – all of which can be orchestrated automatically to make for a high payment success rate.
What’s more, you can modify payment actions in CoreWallet to react to payment defaults. For example, the system can retry payments after specific intervals or given specific circumstances. Only after several failures, a payment gains the status Failed and CoreWallet notifies the respective parties (i.e. via e-mail or SMS) .
Putting in a little development effort, you can also set up payment routing functions in CoreWallet: The system then automatically chooses the payment service provider with the highest probability of success and the lowest possible costs.
And should all these efforts turn out unsuccessful: CoreWallet comes with reporting features and payment history tracking, it can be integrated with 3rd party debt collection agencies, if legal action can’t be prevented. In addition, CoreWallet itself is able to process fines and fees, flexibly adjustable if needed.
Scoring and Screening (= Assessing Who May Pay What)
The third challenge of self-created Buy Now Pay Later systems is at the crossroads of our two former challenges. Some customers have high creditworthiness and their transactions proceed smoothly. Some customers pose risks.
As a BNPL provider, you must be able to always tell those cases apart. Customer screening and scoring are crucial parts in Buy Now Pay Later to prevent fraud and ongoing payment failures. You need high-performing KYC, fraud prevention and risk assessment software – not only for onboarding, but for continuous monitoring of your customers’ payment behavior.
And when you realize that a customer has low solvency or payment performance decreased over time, you must equip your BNPL system to react accordingly, setting limits or even denying specific purchases.
How to Do It With CoreWallet
CoreWallet has pre-built KYC processes for customer data verification, e.g. automated email, phone number and bank account verification or manual verification of the personal customer data by admin users using documents uploaded by the customer. Depending on the system KYC configuration CoreWallet can assign different customer verification levels automatically, when new customer data is verified through mentioned KYC processes.
Based on those KYC verification levels you can configure allowed actions and different limits in CoreWallet, for example a limit, that only customers with a certain verification level may pay higher amounts via your Buy Now Pay Later method.
Through extension points, the CoreWallet framework can also easily integrate 3rd party providers of risk assessment, fraud prevention and KYC services, allowing you to automate / outsource the KYC verification and to have a smart risk and fraud assessment per customer and payment transaction.
BNPL Made to Match Your Business (More Features)
Aside from the features mentioned before, you can mold the CoreWallet framework in any shape you want concerning payment software. Why only go with the boring basics of BNPL, when you can have:
- Wallet Top-Up: In a Wallet-Based BNPL system (see above), you can implement top-up features. By that, you enable customers to increase their wallet account balances, effectively enabling the prepaid flow for future purchases or due BNPL payments, decreasing the risk of payment defaults.
- Various Currencies: On platforms serving multiple markets across borders, why not allow various currencies to be applied in the same transaction – including virtual currencies like loyalty points gathered by buying your goods or services?
- Multi-Tenancy Support: Wanting your subsidiaries to use your BNPL system, too? CoreWallet’s licensing options cover such enterprises.