Buy now, pay later for merchants: The 2023 guide

Are you happy with your buy now, pay later solution? Learn what’s new and how to get the most from buy now, pay later for merchants.

If you've ever bought something on layaway, you've used an early form of buy now, pay later. Layaway is typically a service offered by brick-and-mortar stores in which they will store an item for you (or “lay it away”) while you pay them over time.

Buy now, pay later for merchants improves on this concept for ecommerce. Rather than waiting for payment and then releasing the item, merchants get paid up front and leave the management of repayment to a third party. Buy now, pay later (BNPL) benefits customers too, allowing them to get what they need, when they need it.

In 2023, buy now, pay later for business is expected to be booming. From in-store installment offers to deferred-interest store cards and third-party BNPL providers, many businesses already offer some form of BNPL — and if you don't, you may be missing out on quite a few buy now, pay later benefits.

For enterprise-level organizations, the stakes could be even higher. But what's the difference between enterprise-level BNPL options? What’s new in 2023? And how can you be sure you’re getting the most from your BNPL provider?

The rise of buy now, pay later for merchants

While the concept of split installment services for businesses has been around for decades, BNPL as we know it has dramatically increased in popularity over the past several years. According to the Wall Street Journal, BNPL payment options grew rapidly during the pandemic as consumers looked to avoid taking on new credit card debt.¹ In the second quarter of 2022, total outstanding consumer credit in the US amounted to $4.6 trillion.²

This could be why the BNPL market is growing so quickly: US consumers took out three times more BNPL loans in 2021 than they did in 2020³ and overall US BNPL lending is estimated to surpass $100 billion by 2024.⁴ In the US, PayPal’s Pay in 4 offering has $6.6B in TPV since launch, and has processed 50.2M loans.⁵

How buy now, pay later works for merchants

Many merchants who offer BNPL rely on a third-party service provider. That means the process involves three parties:

• The customer: The person buying the product is arguably the most important piece of the puzzle.
• The BNPL provider: The third-party provider facilitates the transaction.
• The merchant: Businesses choose BNPL to help increase their sales and average order value.

The merchant pays the provider a fee at the time of the transaction, and then the provider oversees the actual repayment of the loan. Here are some of the most common questions about how it works for merchants.

Does buy now, pay later require a credit check?

Most types of buy now, pay later for merchants do require a credit check to help providers ensure that they will be paid back. The customer will enter the necessary details and the provider will run a credit check on the spot. Sometimes only a soft credit check is needed, which doesn’t affect customers’ credit scores because it doesn’t get reported to credit bureaus. Other types of BNPL may require a hard credit check, which will be reported.

PayPal Pay Later, which includes Pay in 4 and Pay Monthly,⁶ makes speedy decisions using historical data and advanced risk modeling to let customers know in seconds if their application is approved. Once the customer is approved, the transaction can be completed.

How much do merchants typically pay for buy now, pay later?

When the transaction is processed, the BNPL provider typically will take the agreed-upon percentage out of the total amount. They can then remit the remaining amount to the merchant. There are several factors that could go into the contracted fee, including total purchase volume. The fees usually involve a percentage of the transaction as well as a flat fee.

Large organizations will likely need to get a quote to find out exactly what their fees might be. PayPal Pay Later takes some of the guesswork out of the equation because the options are included in PayPal Checkout. That means there’s no additional fee for PayPal Pay Later beyond your existing PayPal rate.

When does the merchant get paid?

One of the biggest benefits of buy now, pay later for merchants is that the business gets paid up front, while customers are able to pay over time. Merchants typically receive payment within one to three days, and the process is similar to a credit card.

What is the customer experience like?

It may seem that the first step is for the customer to put an item in the cart. However, dynamic promotional messaging, which advertises BNPL options earlier in the buying journey, for example on the product page, can actually encourage the customer to put the item in the cart: 74% of buy now, pay later users say that seeing a BNPL message while shopping encouraged them to complete a purchase.⁷

Once they start the checkout process, they can typically click to pay with buy now, pay later as they would any other payment option. From there they'll be prompted to add their information, choose their plan, and complete checkout. Depending on the option they choose, an initial down payment may be due.

How is payment collected from the customer?

Another benefit of buy now, pay later for merchants is that it then becomes the BNPL provider’s responsibility to manage repayments. That means merchants don't take on the financial risk of lending. The customer will go through the provider’s app or website to make their payments. With PayPal Pay Later, customers can conveniently see status, make a payment, and review plan details right within their PayPal account.

What about returns?

Because the loan repayment agreement is with a third-party provider, the return process can vary. For example, the agreement may require the customer to continue making payments while the return is processing.⁸ On the merchant side, some BNPL providers may require extra steps for returns.

With PayPal, when a customer returns something they purchased with Pay in 4 or Pay Monthly, merchants simply use our standard refund process and we provide a credit to the customer.

How to become a buy now, pay later merchant

Buy now, pay later for merchants is increasingly becoming a must-have. If you don't already offer BNPL, getting started doesn't have to be overwhelming. And if you do already offer it, 2023 is the perfect time to consider your options and learn how you can better leverage BNPL, for example by using dynamic promotional messaging. Here's what you need to do.

Consider various types of BNPL

Not all buy now, pay later for business is the same. There are several different types offered:

• Short-term installments are typically BNPL plans where payments are split into four installments and do not have interest charges, although other options may be available.
• Monthly payments are often used for larger purchases. They split up the purchase price into anywhere from 6 to 36 monthly payments, and may include interest charges.
• Deferred-interest credit is a form of financing that many stores offer. The customer pays no interest as long as the loan is repaid within a certain amount of time.

Many merchants are choosing to offer short-term installment and monthly payment options. When deciding what you need, consider your product pricing: short-term installments are typically for smaller purchase amounts, while monthly payments are for larger amounts.

For example, PayPal Pay Later has two options: Pay in 4 is designed for purchases from $30 to $1500, and is split into four payments. Pay Monthly is designed for purchases up to $10,000 and can be repaid over 6, 12, or 24 months.

Choose the right provider

With the growing popularity of buy now, pay later for merchants, BNPL providers are also proliferating. While at first glance they may all seem the same, there are a few things to consider:

• Trust: 36% of BNPL users say that trusting the provider is an important feature of a BNPL payment option.⁹ And PayPal is the most trusted brand across BNPL payment providers.¹⁰
• Reach: Many BNPL providers are now household names, but even among younger generations, they may not be as familiar as you think: 85% of millennials have heard of PayPal, compared to an average of 17% among the top six competing BNPL providers, and 75% of Gen Z have heard of PayPal, compared to an average of 12% among the top six competing BNPL providers.¹¹
• Customer experience: Frictionless experiences are important, especially for younger generations. In the US, 50% of Gen Zers consider the experience important.¹² Pay Later has you covered: 77% of PayPal consumers using BNPL say that PayPal makes checkout faster.¹³
• Fees: Getting the lowest possible BNPL fees can make quite a difference for enterprise organizations with millions of dollars in sales. It's worth it to shop around to find the best rate. If you already offer PayPal, keep in mind that you’ll pay no additional fees for Pay Later.

Set up your BNPL integration

Once you've made your decision, the actual process for how to become a buy now, pay later merchant is generally straightforward. You'll apply for the service, be granted an account, and then integrate the offering into your ecommerce store. Ease of integration can vary by provider and can even be influenced by your payment processing platform.

With PayPal Pay Later, many large enterprises can offer BNPL across their websites and in multiple countries with a single integration. First, start a PayPal business account and then set up PayPal checkout — Pay Later is included for most merchants. If you already have a PayPal business account, how to set up an item for buy now, pay later could be even easier. Just make sure you're upgraded to the latest version, and Pay Later can be automatically included for applicable items on your website.

Don't forget to promote BNPL

In 2023, buy now, pay later for merchants doesn’t end with simply offering BNPL at checkout. You can use promotional messaging to let customers know earlier in the buying journey that you offer a certain BNPL option. And when your BNPL provider is as trusted and familiar as PayPal, you may see benefits. Our merchants saw an additional 12% lift in sales after six months when adding Pay Later upstream messaging.¹⁴

Which buy now, pay later provider should I choose?

The best buy now, pay later apps for merchants will vary depending on many factors. It's always smart to shop around for the best rates, customer experience, and onboarding. Keep in mind that you can also offer more than one buy now, pay later service — an especially important consideration for global enterprises who may need to reach many markets.

For merchants who want to expand their reach with a trusted BNPL provider, PayPal Pay Later could be a good solution. There are 432 million global active PayPal accounts, and more than 22 million consumer accounts have completed a Pay Later transaction.¹⁵ Younger customers (29 or lower) make up 25% of the PayPal US customer base,¹⁶ but we also have a strong reach in every other age group.¹⁷

Buy now, pay later for merchants in 2023 and beyond

A BNPL solution that can reach all demographics may be important in the future. While three-fourths (almost 75%) of BNPL users in the US are currently Gen Z or millennials,¹⁸ the demographics of credit and buy now, pay later are changing: Gen X is adopting BNPL at nearly as fast a rate as younger generations,¹⁹ and by 2025, eMarketer predicts that Gen X and Boomers will make up roughly one-third of BNPL users.¹⁸

Buy now, pay later for merchants may also face increased regulation. The Consumer Financial Protection Bureau (CFPB) began officially monitoring the market in December 2021 by issuing orders for information and data on consumer impact to five BNPL firms.²⁰ While no official rules have been made, this could signal the coming of new regulations. PayPal has years of experience with regulatory compliance and is always monitoring the regulatory environment so we can help large enterprises manage the changing dynamics.

Ultimately the best buy now, pay later for merchants in 2023 may come down to the need to choose a large, experienced BNPL provider who can provide the multiple options that enterprises need, as well as guidance and expertise for years to come. PayPal’s extensive reach and customer trust can help enterprises drive conversion, cart size, and loyalty – download our infographic to learn more.