Buy now, pay later (BNPL) solutions have brought one of the biggest disruptions to the e-commerce industry in recent years. It’s one the fastest growing payment methods globally, particularly when it comes to online purchases.

Globally, BNPL accounted for 2.9% of global e-commerce transaction value in 2021, and that’s projected to grow to 5.3% by 2025. Take up in Europe has been even greater; BNPL accounted for 8.1% of 2021 e-commerce spend in Europe and is projected to hit 12% by 2025.¹

Leading provider Klarna has some 90 million active users worldwide, while competitors Afterpay and Affirm have around 16 million and 7 million, respectively.²

Here, we’ll take a deeper look at how buy now, pay later payment models work and what to bear in mind if you’re thinking about them for your business.

Buy now, pay later providers offer a way for consumers to spread the cost of purchases over several weeks or months. The exact model of individual providers may vary, but typically merchants receive the full price of the goods upfront and the BNPL provider takes on the debt from the consumer.³

Some schemes require consumers to pay a portion upfront and repay the remaining balance in regular instalments. Others take no upfront payment but require the consumer to repay the full balance within 30 days. Typically, if consumers pay the balance in the agreed time, they will incur no interest or fees.⁴

Only you can say for sure if BNPL options are right for your business. But the payment method can be suitable both for businesses selling higher priced products and those with more budget-conscious consumers. As such, products sold via BNPL vary considerably. According to one data set, the items most commonly purchased with BNPL payments are electronics, clothing and fashion, and furniture or appliances.⁵

It’s worth thinking about the growth trajectory of BNPL, too. If it becomes more popular with consumers and a payment method they expect to be available, you could potentially start missing out on sales by not offering it. Plus, it makes products accessible to consumers who might otherwise have been priced out of the products you’re selling.³

But there are financial implications. Adding a BNPL feature to your website will come with a cost. In addition, fees for retailers tend to be higher for BNPL transactions compared to typical credit or debit card transaction fees – which means you may make less money on these sales than you otherwise would have.³

This needs to be balanced against the potential upside. According to one estimate, offering a BNPL option increases retail conversion rates by 20-30%, as well as increasing the average basket value by 30-50%.⁶

Who you are selling to:

BNPL is currently most popular with younger consumers, with Gen Z increasing its spending by 200% between January 2020 and September 2021.⁷ And research by eMarketer found that 75% of BNPL users in the U.S. in 2021 were Gen Z or Millennial.⁸ But think about the future too. It also predicts that 31% of Gen X consumers and 15% of Baby Boomers will use the payment method by 2025.⁸

Where you are selling:

It’s worth bearing in mind that the popularity of BNPL varies significantly between different regions and countries. It has its largest share of e-commerce transaction value in Europe at 8.1%, and it’s particularly popular in Nordic countries; in Sweden, for example, a quarter of 2021 e-commerce spend came from BNPL.¹ Its less popular, but still significant, in the U.S. where it accounts for around 4% of ecommerce spend. In Asia Pacific and Middle East and Africa regions, BNPL represents a much smaller share of the market.¹ Consider the popularity of specific BNPL providers in the countries you’re selling in, too.

The ethics of potential providers:

There have been concerns that some BNPL models are fuelling unhealthy spending and consumer debt.⁹ And in some countries, BNPL models have caught the attention of legislators. In the UK, for example, BNPL providers are set to be regulated by the Financial Conduct Authority, like banks, in order to provide more robust protection for consumers.⁴ With this in mind, it could be worth doing thorough research on different BNPL providers to ensure they align with your business’s values.