Buy Now, Pay Later: What Merchants Need to Know

Alternative payment methods have become a permanent fixture of modern commerce as consumer expectations around speed, flexibility, and convenience continue to evolve.

Digital wallets such as Apple Pay and Google Pay are now standard at checkout, while platforms like PayPal and Venmo are deeply embedded in both online and in-store purchasing behavior. Within this environment, one of the fastest-growing—and most discussed—payment options is buy now, pay later (BNPL).

Although BNPL resembles traditional installment plans that have existed for generations, its modern appeal comes from third-party providers that remove much of the administrative and financial burden from merchants.

When a customer uses a BNPL service, the merchant is typically paid upfront, while the provider assumes responsibility for collecting installment payments from the customer. This structure allows merchants to offer flexible payment options without extending credit directly or managing repayment risk themselves.

BNPL providers pay merchants immediately for purchases made using their service and then recover those funds over time from the customer. For merchants, this can translate into higher conversion rates, larger average order values, and access to customers who might otherwise hesitate to make high-ticket purchases.

What Is Buy Now, Pay Later (BNPL)?

At its core, BNPL allows customers to split a purchase into a series of installments while receiving the product or service immediately. In that sense, it combines elements of traditional installment plans and credit purchases, but with a streamlined, digital-first experience.

Like credit cards, BNPL can help customers manage larger purchases by spreading payments over time. Unlike credit cards, many BNPL plans are accessible to consumers who may not qualify for traditional credit products or who prefer alternatives to revolving credit. This has made BNPL particularly popular among younger consumers and digital-first shoppers, though adoption has expanded well beyond those groups.

While merchants can technically offer installment plans in-house, most choose to partner with third-party BNPL providers that handle underwriting, payment collection, and customer account management. Well-known providers such as Affirm, Klarna, and Afterpay offer BNPL options across a wide range of e-commerce platforms and point-of-sale systems.

BNPL usage is now firmly established in the U.S. and other major markets. While growth has slowed from its initial surge, BNPL remains a meaningful and evolving segment of the global e-commerce payment ecosystem.

How Do BNPL Services Work?

Third-party BNPL providers integrate directly into a merchant’s checkout flow, offering customers an additional payment option. Once the transaction is completed, the provider pays the merchant—often within one to two business days—while the customer repays the provider according to the agreed-upon installment schedule.

Some BNPL plans use a fixed repayment structure, such as four equal payments made every two weeks, while others allow customers to select longer repayment terms. Short-term plans are often interest-free if payments are made on time, while longer-term plans may include interest or financing charges.

If customers miss payments, they may incur late fees, lose access to additional BNPL purchases, or face negative credit reporting. Unlike earlier iterations of BNPL, many major providers now report repayment activity to one or more credit bureaus, meaning BNPL usage can affect a customer’s credit profile.

Approval is typically fast and frictionless, often relying on soft credit checks, behavioral data, and identity verification tools rather than traditional hard inquiries. Some BNPL models also exist outside the standard installment framework, including deferred billing arrangements and BNPL plans offered directly through credit card issuers.

What BNPL Options Are Available to Merchants?

Merchants evaluating BNPL solutions will generally encounter two primary pricing models:

Merchant-Fee (Zero-Interest) Plans

Under this model, the customer pays no interest as long as payments are made on time. Instead, the merchant pays a transaction fee to the BNPL provider. These fees commonly range from approximately 2% to 8% of the purchase amount, sometimes with an additional per-transaction charge.

Pricing is typically negotiated and not publicly disclosed, requiring merchants to complete an onboarding and underwriting process to receive a quote.

Shopper-Interest Plans

With shopper-interest plans, the merchant pays little to no transaction fee, but the customer is charged interest over the life of the installment plan. While this can reduce costs for merchants, it may also reduce customer adoption, particularly among price-sensitive shoppers.

BNPL can be especially effective for merchants selling high-value goods or services, where installment payments help reduce sticker shock and cart abandonment. Many providers report increases in average order value and conversion rates, though results vary by vertical and customer base.

Choosing the Right BNPL Provider

Selecting a BNPL provider is a strategic decision that can directly affect customer experience, operational risk, and profitability. Merchants should evaluate providers across several key dimensions:

Reputation and Stability
Providers with a strong track record, positive consumer sentiment, and financial stability are better positioned to support long-term partnerships.

Fee Transparency
Merchants should fully understand transaction fees, dispute policies, settlement timelines, and any additional costs before onboarding.

Integration and Flexibility
Seamless integration with existing e-commerce platforms and payment systems minimizes friction and speeds deployment.

Approval Process and Customer Experience
Fast, intuitive approval flows improve checkout completion rates and reduce customer frustration.

Plan Variety
Offering multiple installment options allows merchants to appeal to a broader range of customer preferences.

Customer Support and Dispute Handling
Strong support and clear dispute resolution processes are essential for maintaining customer trust and operational efficiency.

What Kinds of BNPL Fraud Are Out There?

Account takeover fraud remains one of the most common risks associated with BNPL. If a fraudster gains access to a customer’s BNPL account credentials, they may be able to make purchases across multiple merchants that accept the same provider.

While BNPL providers often absorb a portion of fraud-related losses, liability is not always absolute. Responsibility may depend on the provider’s policies, the nature of the dispute, and whether merchants followed required fraud-prevention protocols.

Merchants should monitor BNPL transactions for common fraud indicators, including:

• Unusual purchasing behavior
• New devices or IP addresses
• Rapid transaction velocity
• Shipping address changes
  

Automated fraud tools can help flag suspicious activity, but manual review remains important to avoid false positives and customer friction.

How BNPL Affects Chargebacks

Because the customer repays the BNPL provider rather than the merchant directly, traditional card-network chargeback exposure is often reduced. However, this does not mean merchants are completely insulated from disputes.

Chargebacks related to product quality, delivery issues, or misrepresentation may still be passed back to the merchant, depending on the provider’s policies. Merchants should carefully review dispute and reimbursement terms before partnering with any BNPL provider.

BNPL may also increase return rates, as customers are more likely to make impulse purchases when no upfront payment is required. Clear return policies and transparent communication can help mitigate this risk.

Friendly Fraud and Identity Misuse

BNPL’s streamlined checkout experience can make it attractive for identity misuse and friendly fraud. Although most major providers now use layered identity verification—including behavioral analytics and device fingerprinting—disputes involving claimed identity theft can still be difficult to resolve.

As consumer awareness grows, some customers may attempt to exploit BNPL dispute processes, increasing the importance of strong transaction records, clear customer consent mechanisms, and thorough order documentation.

The Risks of BNPL for Merchants

BNPL’s popularity has been driven by broader economic pressures, shifting consumer attitudes toward credit, and demand for payment flexibility. While these services offer meaningful upside, they also carry risks.

Customers may overextend themselves across multiple BNPL plans, increasing default rates and disputes. From the provider side, pricing models and policies continue to evolve as the industry matures, regulations tighten, and competition intensifies.

Consolidation and increased scrutiny have already reshaped the BNPL market, making provider selection more important than ever. Merchants should also pay close attention to cross-border transactions, currency exchange considerations, and how providers handle fluctuations over extended installment periods.

Final Thoughts

BNPL can be a powerful tool for increasing conversions, expanding customer reach, and supporting high-value purchases. At the same time, it introduces new considerations around fraud, disputes, customer behavior, and long-term cost.

Merchants who approach BNPL strategically—by selecting reputable providers, understanding liability exposure, and maintaining strong fraud controls—are best positioned to benefit from this evolving payment method while minimizing risk.