Buy-now-pay-later options offer shoppers a convenient, flexible, and often low-cost way to finance purchases, but merchants may pay relatively steep transaction fees.
BNPL is popular, and customers likely spend more when it is available. The downside to merchants is the cost, typically a 2% to 8% fee for BNPL transactions versus roughly 3% for payment cards alone.
With fees as high as 8%, store owners must ask whether the additional sales from BNPL are worthwhile. The short answer is probably “yes,” although reminiscing and math will make it more clear.
Free Shipping
Fast and free shipping has become a staple of the ecommerce industry. For some online segments, such as fashion and toys, free shipping is a competitive requirement and an ante to participate. Yet years ago, merchants worried that shipping costs would break them.
The free shipping dilemma was simple: Customers loved it. A shopper was more likely to buy if shipping was free. The challenge for merchants was ensuring the additional revenue covered the expense.
Today, almost no seller worries about free shipping. Merchants adjusted prices. Distribution and warehousing models became decentralized, moving products close to customers. Ecommerce thrived.
BNPL presents a similar problem. It boosts gross revenue but at a cost.
BNPL Lift
One way to measure BNPL’s impact on profit is to compare the increase in sales to the relatively higher transaction fees.
Imagine an online store with sales of $100,000 per month before it adds a BNPL option.
- Revenue: $100,000
- Credit card fees (3%): $3,000
- Net revenue after fees: $97,000
The shop nets 97% of the gross revenue without considering the cost of goods sold, overhead, advertising, et cetera.
Next, let’s assume that adding BNPL improves top-line revenue by 20% (to $120,000) and prompts some buyers to switch to BNPL so that only 70% of sales come from payment cards and 30% from BNPL.
We need to calculate the total blended fee. First, we know payment cards cost 3% of $84,000 (70% of $120,000), which is $2,520.
For a 6% BNPL fee, the shop would pay $2,160 on $36,000 (30% of $120,000) in sales. Thus, the total fees paid for the improved $120,000 would total $4,680, making the blended fee 3.9%.
- Revenue: $120,000
- Blended fees (3.9%): $4,680
- Net revenue after fees: $115,320
In short, net revenue was $97,000 without BNPL and $115,320 with it — 97% and 96.1%, respectively, of gross revenue.
BNPL Impact
A slight decrease in net revenue percentage might be well worth it for a nominal increase of $18,320 ($115,320 – $97,000).
The real bottom line is that BNPL is here to stay. Merchants must understand how it impacts profit. The BNPL dilemma is similar to free shipping years ago. Merchants have a track record of adapting to succeed.