What Is Buy Now, Pay Later? A Clear Guide to How BNPL Works

Buy now, pay later (BNPL) has been showing up everywhere lately. From big-ticket items like luxury goods and electronics to everyday purchases like food and groceries, more and more consumers are choosing to finance what they buy, making it easier to fit purchases into their budget.

Instead of paying in full, customers can spread a purchase across several smaller payments and finish checkout in seconds. It sounds simple, but there’s more to it behind the scenes.

This guide explains what BNPL is, how providers make it work, and what retailers should consider before jumping in.

What Is Buy Now, Pay Later (BNPL)?

Buy now, pay later, or BNPL for short, is a payment option that lets customers split a purchase into smaller installments instead of paying the full amount upfront. BNPL is most often billed in four installments; the first payment is due at checkout, and the following three are paid every two weeks.

Consumers love BNPL for its convenience and flexibility. It makes larger purchases feel more manageable and can help with budgeting. According to the Federal Reserve, in 2024, 15% of consumers used BNPL in the past 12 months, up from 10% in 2021. ^[1] Federal Reserve. “Report on the Economic Well-Being of U.S. Households in 2024 – May 2025″. Accessed December 12, 2025.

How Buy Now, Pay Later Works

What does the BNPL process look like? That depends on which side of the checkout you’re on. Here’s a closer look at how buy now, pay later works for merchants and consumers.

The Customer Journey

If you’re a shopper opting for BNPL as your payment option, you’ll typically go through these steps.

Step 1: Choose BNPL at Checkout

A shopper adds items to their cart and heads to checkout. When they see a buy now, pay later option listed with other payment methods, they pick it because it feels easier on the budget.

Step 2: Get a Quick Approval

The BNPL provider runs a quick eligibility check using basic information such as name, phone number, and date of birth. Providers run a soft credit check (which doesn’t affect the credit score) and use internal algorithms based on the provided basic information. 

As such, there’s no long application, and most decisions take only a few seconds. This fast approval process helps reduce friction at checkout and keeps the shopping experience smooth.

Step 3: Review the Payment Plan

Once approved, the shopper sees how their purchase will be split. Most pay-in-four plans break the total into four equal payments scheduled over six weeks.

The customer would need to make the first payment up front and review the due dates for the other three payments.

Step 4: Complete the Purchase

The shopper confirms the order and gets a receipt just like any other checkout flow. Their items are shipped or made available for pickup right away, even though they only paid a portion.

Step 5: Make the Remaining Payments

The BNPL provider charges the remaining installments automatically using the payment method the shopper added. The shopper can track upcoming payments in the provider’s app and update their card if needed. Most BNPL apps also send reminders to help customers avoid missed payments.

The Merchant Side of BNPL

Merchants offering BNPL need to take a few steps to get the payment option live and working at checkout.

Step 1: Add a BNPL Provider to Your Store

The merchant integrates a BNPL provider through their eCommerce platform or POS. Most setups only take a few clicks, and merchants can start displaying BNPL pricing on product pages and checkout.

Step 2: Present BNPL as a Payment Option

Once enabled, BNPL appears as another option at the checkout page (or the checkout counter for physical retailers).

If the customer chooses this option, the merchant doesn’t handle approval decisions. The provider manages the risk checks directly.

Step 3: Receive the Full Payment Upfront

After a customer checks out, the provider pays the merchant the net order value (the full value minus the BNPL fee) upfront, usually within one to three business days. The merchant doesn’t wait for the customer’s installments.

Step 4: Let the Provider Handle Repayment

The buy now, pay later provider collects the customer’s installments over time. If a shopper misses a payment, the BNPL provider handles reminders, fees, and collections, and the merchant stays out of it.

Step 5: Track BNPL Sales and Performance

Merchants can monitor BNPL transactions inside their eCommerce dashboard or the provider’s portal. They can see how often customers choose BNPL, how it affects conversions, and whether it increases average order value. This data can help merchants decide if BNPL is a profitable option for their store.

How BNPL Integrates Into Your Store

The integration process is pretty straightforward. You can integrate BNPL just like you would other payment methods. The process involves installing the provider’s app, connecting your account, and enabling installment payments at checkout.

From there, you can start displaying BNPL as a payment option to customers. Everything runs through your existing eCommerce platform, so you don’t need to rebuild your checkout flow. 

Leading BNPL Providers and How They Compare

Merchants looking to offer BNPL have several options. Comparing providers can help you find the right balance between fees, customer experience, and potential sales impact. By doing this, you can choose a BNPL solution that aligns with your business goals and your customers’ preferences. They include: 

Why Businesses Offer BNPL

BNPL gives shoppers more flexibility at checkout, helping merchants improve the buying experience. Let’s take a closer look at the main ways BNPL can benefit your business.

Key Risks and Drawbacks to Consider

BNPL can create a win-win situation for both merchants and customers, but it’s not without some drawbacks. Let’s look at some things to watch out for below.

Merchant Fees That Reduce Margins

While it’s true that BNPL can increase AOVs and conversions, that lift in performance comes with a higher cost. Buy now, pay later providers typically charge higher merchant fees compared to credit and debit card processing.

According to Equifax, BNPL providers charge a higher MDR of 3% to 6% versus traditional credit and debit card rates, which can fall between 2% to 3%. ^[4] Equifax. “A not-so beginner’s guide to Buy Now, Pay Later“. Accessed December 12, 2025.

Merchants should weigh these fees against the potential increase in revenue and conversion, especially if margins are already tight.

Higher Return Rates From Overextended Shoppers

Buyer’s remorse is real, especially with BNPL purchases. Research from Motley Fool Money shows that 26% of consumers who’ve used buy now, pay later have regretted the decision.^[5] Motley Fool Money. “2025 Buy Now, Pay Later Trends Study“. Accessed December 12, 2025.

That regret can lead to product returns, which then adds extra cost and creates more operational work for your team. Some merchants also report that BNPL can slightly increase the frequency of smaller, impulse-driven purchases, which can impact return management and inventory planning.

Data Ownership and Customer Relationship Concerns

When customers check out through a BNPL provider, the payment flow often shifts away from the merchant and into the provider’s ecosystem. That can limit how much data you see about the customer and how they shop. 

Some BNPL services capture emails, shopping preferences, and purchase behavior inside their own apps. This can make it harder for you to build deeper relationships, send personalized campaigns, or retarget customers later. Merchants may need to supplement with their own loyalty or CRM programs to maintain direct connections with customers.

Regulatory Landscape for BNPL

BNPL continues to grow, and regulators are paying close attention. Agencies in the United States, including the Consumer Financial Protection Bureau (CFPB), have signaled that BNPL lenders may face rules similar to credit card issuers.^[6] Consumer Finance. “CFPB Takes Action to Ensure Consumers Can Dispute Charges and Obtain Refunds on Buy Now, Pay Later Loans”. Accessed December 12, 2025.

Depending on how the BNPL and payments landscape evolves, other regulations might emerge.

As the merchant, you need to stay informed and choose partners that can adapt as the rules evolve.

How BNPL Impacts Cash Flow, Refunds, and Accounting

Ready to offer BNPL? Here’s how to manage the finance and accounting side.

Settlement Times and Cash Flow Predictability

When a customer uses a BNPL option, you don’t wait for their payments to trickle in over six weeks or six months. The BNPL provider pays you the lump sum right away, minus their merchant fee. You get the money in your bank account just as fast, or sometimes even faster, than a standard credit card transaction.

For accurate financial planning and forecasting, you’ll want to understand:

• How often payouts are batched 
• Whether weekend or holiday delays apply
• How fees are deducted 

Once you know what to expect, it becomes easier to budget and forecast revenue. This predictable cash flow is one of BNPL’s biggest advantages; you’re not carrying accounts receivable or chasing customer payments.

Returns and Refunds

When a customer returns an item originally bought with BNPL, you process the refund directly through the BNPL provider’s portal or via your eCommerce platform’s integration. You refund the full purchase price back to the provider, and they, in turn, adjust the customer’s installment plan. 

If the customer has already made some payments, the provider will refund that money to the customer’s card. The process is straightforward, but tracking these transactions in your accounting system requires attention to detail to ensure your books stay accurate.

Reconciling BNPL Transactions

Accounting for BNPL is a little different from just tracking credit card payments. The key is to remember that every BNPL transaction involves three distinct amounts you need to track: the Gross Sale, the Merchant Fee (the cost of offering BNPL), and the Net Payout you receive. 

If you are only tracking the net amount in your ledger, you won’t have visibility into your true profit margins or the actual cost of offering this payment method. Most providers give you detailed reports that make this easier. Use these reports to categorize the fee as a cost of goods sold or a processing expense.

When reconciling BNPL transactions, you’ll need to:

• Record the full sale amount as revenue
• Record the fee as an expense (the cost of the BNPL service)
• Record the net deposit that hits your bank account

Pro tip: Many accounting platforms now offer integrations with major BNPL providers, which can automate much of this reconciliation work and reduce manual errors.

Alternatives to BNPL for Merchants

BNPL isn’t for everyone. For those who aren’t ready for buy now, pay later, the following payment options can serve as alternatives.

Traditional Credit Card Financing

There’s a reason credit cards continue to be one of the most popular payment methods: they’re familiar, convenient, and accepted almost everywhere customers shop. 

Credit card fees also tend to be lower than BNPL, so on the merchant side, your margins stay healthier, and you avoid the higher MDRs tied to installment providers. Plus, customers who already have credit cards established may prefer using rewards programs they’re invested in.

In-House Installment Plans

If you have the capabilities to do so, consider offering in-house installment plans where you set your own payment schedule and collect installments directly from customers. Rather than going through an external BNPL provider, you keep full control over approvals, fees, and customer communication.

Just bear in mind that providing in-house financing means you will take on the risk if a customer defaults on the loan. Late BNPL payments are not uncommon: According to a 2025 LendingTree survey, 41% of BNPL users said they paid late in the past year. ^[7] LendingTree. “BNPL Tracker: 41% of Users Late in Past Year, More Using Loans for Groceries“. Accessed December 12, 2025. You’ll also need to consider the compliance requirements, credit reporting obligations, and collection processes that come with extending credit directly.

Deposits or Partial Payment Options

Another alternative is taking deposits or partial payments, wherein you let customers secure a purchase with a smaller upfront amount and pay the rest before fulfillment or delivery. This approach works well for preorders, custom products, larger-ticket items, or services that require lead time. Your customers will appreciate the flexibility, and you’ll be able to reduce risk because the remaining balance is collected before the product ships. 

Is BNPL Right for Your Business?

Before you dive into BNPL, it’s best to figure out if this payment option actually makes sense for your specific products and customers.

Industries That Benefit Most

Businesses in certain areas are a great fit for buy now, pay later because their products are often discretionary, carry a high average order value, or are frequently purchased by younger shoppers. They include:

Evaluating if BNPL Fits Your Customers

Start by looking at how your customers behave today. If you notice friction at checkout or hear questions about price and financing, then BNPL could be a good fit.

Younger shoppers and budget-conscious customers tend to value installment options because they prefer predictable payments over large charges.

To evaluate fit, consider:

If a flexible payment option removes a barrier to buying, BNPL can be an effective tool.  

Signs BNPL May Not Be the Best Fit

BNPL isn’t ideal for every business.

If your store relies on low-ticket, everyday items with slim margins, the higher merchant fees can outweigh the benefits. You may also want to think twice if your audience prefers paying in full or if your category already carries high return rates.

Other signs BNPL may not serve you well include:

• Tight margins that can’t absorb fees of 3 to 6 percent
• A customer base that rarely asks for financing or flexible payments
• Operational limits that make handling returns or disputes more difficult
• High-velocity, low-value transactions where processing complexity outweighs the benefits

Final Words

BNPL can be a great fit, but know that it’s just one of several methods for getting paid. The key is matching your payment options to your customers’ preferences and your business economics.

Whether or not you decide to offer BNPL, know that you’ll always need a solid foundation for accepting credit card payments. Since credit cards remain one of the most widely used ways people pay, it pays to work with a processor that keeps things simple and transparent. If you’re looking for a solution that’s fast, fair, and easy to work with, take a look at Kurv.