What is BNPL (Buy Now, Pay Later)?

With the growing popularity of on-demand services and the rapid development of e-commerce, more and more consumers want to be able to get products immediately and pay for them later.

Although banks have found the solution to the problem for a long time, providing their customers with credit programs often seems complicated to set up. This usually involves providing various documents and the risk of loan denial can be relatively high. This is why startups and FinTech companies have developed a Buy Now, Pay Later (BNPL) solution.

Buy Now, Pay Later financing has grown in popularity relatively quickly among buyers, although it has received a real boost during the Covid-19 pandemic. Online sales skyrockets and customers locked in their homes started buy even more than in pre-pandemic times. BNPL services allow customers to buy as much as they want; however, this financing option is not without certain risks.

This article will look at what BNPL is, how it works, the pros and cons of this type of loan.

What is Buy Now Pay Later?

Buy Now, Pay Later is a type of short-term loan that allows customers to purchase products in equal installments, often without interest. BNPL is best suited for purchasing consumer goods. For example, you won’t get any property or pay for college loans with BNPL.

Instead, you can buy things from e-commerce stores or physical stores. In other words, Buy Now, Pay Later is just one of many convenient payment options offered by online and offline stores.

Various FinTech companies offer Buy Now, Pay Later services, including Klarna, PayPal, American Express and many more.

The number of BNPL offers continues to grow. According to Statista, global use of the service in domestic e-commerce payments has increased from 0.4% in 2016 to 3% in 2021 in 41 countries, being most prevalent in Sweden – 25%, Germany – 20%, Norway – 18%, Finland – 13%, Denmark – 12%, Netherlands – 12%, Australia – 11%, New Zealand – 10% and others.

There are several reasons why consumers prefer using BNPL solutions rather than turning to their credit cards. Here are a few:

  • pandemic financial instability and inability to pay for goods in one payment, customers split their payments into smaller parts;
  • the possibility of buying more goods at once because the first payment is less than 50% and the rest of the sum is spread over several weeks or months;
  • unlike many credit services, BNPL performs soft credit checks, which means that the service does not remove any credit points from customers’ credit scores;
  • simple and easy to organize. For this reason, BNPL is also known as “point-of-sale installment loans” because customers can use it directly at the checkout;
  • BNPL offers specific dates when installments should be covered by payments, so buyers always know when they have to pay next.

How does Buy Now, Pay Later work?

By opting for a BNPL solution, customers benefit from a mini-loan divided into several installments. They can be paid weekly, bi-weekly or monthly. The payment term depends on the particular conditions of the service.

Usually, BNPLs charge interest for the use of their services, although they often offer “interest-free” periods. Therefore, if customers manage to pay off their balance during an interest-free period, they will not be charged interest. However, if a buyer defaults on their payments, they will have to pay the unpaid installments with accrued interest.

Here’s a step-by-step example of how Buy Now, Pay Later works.

  1. A customer makes a purchase of $300 and decides to use a BNPL payment option; payment options can be located in a shopping cart on a retail e-commerce site or at a checkout counter in an offline store;
  2. BNPL performs the customer’s credit check (in most cases this is a soft credit check) and decides whether they can use the service;
  3. When the client is approved, he must pay a small deposit, for example 20 to 30% of the total sum;
  4. The rest of the sum is divided into equal installments which must be paid before a specific date;
  5. The customer receives the article he has purchased and pays the rest of the sum by check, bank transfer, direct debit by debit card, bank account or credit card; in many cases, the sum will be withdrawn automatically.

Advantages and disadvantages of buy now, pay later

Like any service, BNPL has its pros and cons. Let’s see the most significant.

BNPL Advantages

No firm credit check

Many lenders perform thorough credit checks to determine whether their client can use their service or not. This type of verification may remove certain credit points from the customer’s credit score, but it does not guarantee that credit will be offered.

On the other hand, BNPL providers mostly perform a soft pull on a customer’s credit without hurting the credit rating. In addition, it is much easier for clients to obtain a BNPL loan because the sums lent are not large.

Interest-free periods

BNPL companies are interested in acquiring more customers and staying ahead of their competitors. That’s why they often give their responsible customers interest-free periods, involving no interest payments.

Convenience and speed

When applying for a BNPL loan, clients do not have to provide many documents or confirm their bank account or business details. In addition, the BNPL performs quick checks to minimize processing time. Payment options are also convenient as customers can pay with their debit/credit cards, checks, wire transfers and more.

Disadvantages of BNPL

Additional charges for late payment

BNPL is a perfect solution for responsible clients who never forget to pay on time. Unfortunately, if a buyer misses the day of payment, they will be charged a late fee which usually adds up over time.

After the missing payment, a BNPL provider starts charging its client interest which increases with each installment until full payment is made. As a result, interest rates can be relatively high, sometimes even higher than deposit interest rates.

Small credit limits

Different BNPLs have different loan limits ranging from several hundred to one or two thousand dollars. This is because this service was created for small purchases. In this way, the loan depends little on your income.

Doesn’t improve your credit score

It is not possible to improve your credit history with BNPL on-time payments because they are not reported to the credit bureaus. However, if you miss some payments, BNPL providers may report it and the credit score may worsen.

Makes you want to buy more

By using BNPL, you may think you are able to buy more than you can actually afford. This happens because BNPL services only require small payments for goods. Therefore, consumers have to think twice if they really need that unique item on Amazon or if they are just swayed by their immediate wants and desires.


Buy Now, Pay Later is a convenient service that allows shoppers to immediately get the products they want online and in offline stores. Thus, to offer an exceptional experience to their customers and increase their purchasing power, merchants integrate BNPL financing options into their services.

If you are also looking for ways to develop BNPL solution for your digital or physical store, Scand company is ready to help you. Scand (dotcom – software) is a successful FinTech provider with over 20 years of experience in the international software development market.

Image credit: provided by the author; Thank you!

Victoria Pujevich

Victoria Pujevich

Senior Specialist

Senior Specialist at SCAND with over 15 years of experience in the IT field, eager to share expert advice and share relevant industry experience.

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