BNPL: Adding Another Acronym To Our Payments Vocabulary

BNPL: Adding Another Acronym To Our Payments Vocabulary
Eric O’Brien VP, Collaboration and Education Merchant Advisory Group
Nov 15, 2021

MAG formed a new Community of Practice in 2020 to explore Buy Now, Pay Later with a clear purpose: understand the state of the BNPL industry – who the players are, what types of services they offer, how they impact merchants and how they fold into the existing payment processes merchants have today. We created a matrix of items we wanted to evaluate amongst all providers – including consumer experience, refunds, reporting options, settlement timelines, fraud and liability risk, fee structures, targeted types of transactions, and underlying payment economics to name a few. We are close to publishing the results of those efforts to all MAG members, so be on the lookout for a communication soon.

We observed two different types of Buy Now, Pay Later models throughout the course of our research:

  • Split Payments – A form of Buy Now, Pay Later with a shorter payback period. Split Pay is typically the total purchase price divided into four payments generally with a down payment made by the customer at the time of the purchase, although some providers will delay the first payment by several weeks. A designated credit or debit card then makes automatic payments every two weeks until the purchase price has been paid in full.
  • Installment Payments – Installment Payments are generally longer term in nature than ‘split payments’ and require the consumer to pay back the total purchase price in smaller increments over an extended period of time. Installment Payments are similar to traditional loans that require the borrow to repay in full in 12-, 24- or 36-month terms. BNPL providers may partner with a traditional bank for the underwriting and funding of these types of loans.

In addition to the types of Buy Now, Pay Later services that exist in the market today, integrated vs. non-integrated solutions have distinctions. Some providers do not require a direct merchant integration for their product to work in a retail location. These types of services are offered through general open-loop cards that ride on a global network rail such as Visa or Mastercard. This is the case with Klarna, for example, which offers consumers a virtual Visa prepaid card that can be used via a contactless reader at any contactless-accepting merchant in the United States. Sezzle, on the other hand, does require a merchant integration but still rides on global network rails –accomplished through Merchant ID (MID) restrictions, meaning a card can only be used on approved Merchant IDs, otherwise the transaction will be declined. It’s important for merchants to be aware of the fees they are being assessed in both integrated and non-integrated environments, as interchange on top of provider fees can significantly increase the effective cost of acceptance on these services.

At the recent 2021 Annual Conference on September, I moderated a panel with five Buy Now, Pay Later providers – all MAG sponsors, including Afterpay, Klarna, OPY, Quadpay, and Sezzle (listed alphabetically). We discussed how their products work, where they see the industry trending, and what they think BNPL will look like five years from now. It was a great session; thank you to our partners for spending some time in sharing their knowledge and expertise with our merchants. 
The Merchant Advisory Group

Driving positive change and innovation in the payments industry that serves the merchants interest through collaboration, education, and advocacy.