What Every Merchant Should Know Before Offering Buy Now, Pay Later
For years, merchants have been told that Buy Now, Pay Later (BNPL) can be a powerful way to increase sales.
The pitch is compelling: give customers the ability to split a purchase into manageable payments, remove the upfront price barrier, increase conversion, and potentially increase average order value (AOV).
For an SMB, however, the question shouldn’t simply be:
“Will BNPL increase sales?”
The better question is:
“Will BNPL increase profitable sales enough to justify its cost and operational complexity?”
That distinction matters.
BNPL can be an excellent payment option for some merchants and a poor economic choice for others. Before adding it to the checkout, SMBs should understand five things: conversion upside, merchant fees, customer fit, refunds and disputes, and whether the resulting increase in AOV actually improves the bottom line.
1. The Conversion Opportunity Is Real — But Don’t Assume It Applies to You
BNPL can remove a significant psychological barrier for customers looking at a relatively expensive purchase.
A $600 purchase feels very different when the customer sees “$50 every two weeks” rather than “$600 today.”
That can be particularly valuable for merchants selling products or services where price is a meaningful consideration, including furniture, electronics, home improvement, jewelry, specialty retail, travel, elective services, and other higher-ticket purchases.
But SMBs should be careful about assuming that simply displaying a BNPL option will produce a dramatic increase in conversion.
The impact depends on:
- Your average transaction size
- Your customer demographics
- The types of products you sell
- Existing payment options
- Whether customers already have access to credit
- How prominently BNPL is presented at checkout
- The specific BNPL provider and payment plans offered
A merchant selling $35 products may see little benefit. A merchant selling $1,500 products could see a much more meaningful impact.
The key is to measure incremental conversion, not simply total BNPL volume.
If customers who would have purchased anyway simply switch from a traditional card payment to BNPL, the merchant may be paying a higher cost without generating incremental revenue.
2. Merchant Fees Can Change the Economics
This is where the BNPL conversation gets particularly important for SMBs.
BNPL transactions can carry merchant fees that are materially higher than the merchant’s cost for a conventional card transaction.
The provider is essentially charging the merchant for providing the consumer financing and, depending on the arrangement, assuming certain credit and payment risks.
That can make BNPL attractive from a revenue perspective while simultaneously reducing the merchant’s margin.
Consider a simplified example.
Suppose an SMB has a $500 average order and earns a 40% gross margin.
That produces $200 of gross profit before payment costs.
If BNPL generates a sale that otherwise would not have occurred, paying a higher payment-related fee may be entirely rational.
But if the customer would have purchased using a standard credit card anyway, the additional BNPL cost may simply reduce the merchant’s profit on an existing sale.
Incremental sales are economically different from payment substitution.
Merchants should therefore negotiate and understand the complete BNPL pricing structure—not just the headline merchant discount rate.
Look at transaction fees, percentage fees, potential minimums, integration costs, settlement timing, and any other charges that may apply.
3. Know Whether Your Customers Actually Want It
BNPL isn’t inherently a better payment method. It is a different payment method for a particular customer need.
Before implementing it, examine your customer base.
Are customers frequently abandoning carts because of price?
Are you seeing customers ask about financing?
Is your average order large enough that installment payments meaningfully change affordability?
Do your competitors offer BNPL?
Are younger consumers or other customer segments important to your business?
Your existing payment data can provide useful clues.
If customers already frequently use installment-oriented products or financing, BNPL may be a natural extension of your payment strategy.
If most transactions are small and customers overwhelmingly use debit cards, cash, or inexpensive traditional payment methods, the business case may be considerably weaker.
4. Refunds and Disputes Don’t Disappear
One of the biggest mistakes an SMB can make is evaluating BNPL strictly as a checkout feature.
It is also an operational process.
Before going live, merchants need to understand exactly what happens when an order is:
- Fully refunded
- Partially refunded
- Canceled
- Returned
- Never fulfilled
- Subject to a customer dispute
The customer’s relationship is generally with the BNPL provider as well as the merchant, which can make the process different from a conventional card transaction.
For example, if a customer returns part of an order, how is the customer’s remaining installment obligation recalculated?
When does the merchant receive the refund adjustment?
Who handles the customer’s complaint?
What documentation does the merchant need to provide in a dispute?
Does the BNPL provider have its own dispute process and deadlines?
These questions should be answered before implementation—not after the first difficult customer case.
SMBs should also train customer-service employees on the process. A customer who says, “I returned the merchandise but I’m still being charged,” doesn’t want to hear that the merchant doesn’t understand how its BNPL provider works.
5. The Big Question: Does Higher AOV Pay for BNPL?
This may be the most important calculation for a merchant.
Suppose BNPL increases average order value from $400 to $500.
That’s a 25% increase in revenue per transaction.
Sounds great.
But what happens to gross profit after accounting for:
- Product cost
- BNPL fees
- Shipping
- Returns
- Discounts
- Customer acquisition costs
- Fraud and disputes
- Other variable expenses?
The merchant should calculate incremental contribution margin, not simply incremental revenue.
A useful way to think about the decision is:
Incremental profit from additional BNPL-driven sales + incremental profit from higher AOV – incremental BNPL costs = economic benefit.
And there is another important question:
How many BNPL transactions are truly incremental?
If BNPL increases AOV but doesn’t increase conversion, the merchant may simply be paying more to process larger transactions.
Conversely, if BNPL increases conversion, attracts new customers, and encourages customers to purchase higher-margin products, the economics can become very attractive.
Start With a Test, Not a Leap
For most SMBs, the best approach is not to make BNPL a permanent checkout feature based on a sales presentation or industry benchmark.
Test it.
Establish a baseline for:
- Conversion rate
- AOV
- Gross margin per order
- Payment cost per order
- Return rate
- Chargebacks/disputes
- Customer acquisition cost
Then introduce BNPL and measure the same metrics.
Most importantly, compare incremental profit, not just BNPL transaction volume.
BNPL can be a valuable component of an SMB’s payment strategy. But it shouldn’t be evaluated as simply another button at checkout.
The right question isn’t whether customers will use BNPL.
It’s whether the additional customers and additional spending generated by BNPL create enough incremental profit to compensate the merchant for the additional cost, risk, and operational complexity.
For an SMB, that’s the number that matters.
For additional information and help in understanding if BNPL is right for your business reach out to us at info@payment-roundup.com