Buy Now, Pay Later and Installments in Online Stores Explained
Basics4 minInnovialabs editorial team
In short
The customer takes an installment plan from a third-party service, the service pays the store the order amount upfront minus a fee and then collects payments from the customer, taking on the risk of non-payment.
How it works
BNPL (buy now, pay later) and installment plans let a customer get the product now and pay in parts. For the store, the key point is that money arrives in full and up front, not in parts:
- The customer picks "Pay in installments" at checkout.
- The installment service checks the customer in seconds or minutes and approves a limit.
- The customer confirms the payment schedule and usually makes the first payment.
- The service pays the store the order amount minus its fee.
- From then on the customer pays the service on schedule; the store is not involved.
In effect the store sells at full price and the service lends to the customer.
BNPL versus classic installment loans
| BNPL | Installments via a bank or credit service | |
|---|---|---|
| Term | Short, a few payments | Longer, from several months |
| Order size | Usually small and mid-sized purchases | Works for expensive goods too |
| Customer check | Fast, simplified | Full application, sometimes with documents |
| Extra cost to the customer | Often interest-free if paid on time | Depends on the program; the store may subsidize interest |
| Who pays for "interest-free" | The store, through the fee | The store through the fee or the customer through interest |
The line is blurry and many services offer both. Always look at the actual contract.
Who carries the credit risk
In the typical model the service carries the risk of non-payment: if the customer stops paying, the store keeps its money and the service handles collection. That is what the store's fee pays for.
There are details to check in the contract:
- Product returns. On a return the store refunds the service, and the service recalculates or closes the customer's schedule.
- Fraud. If an order used stolen data and the store broke the rules (for example, shipped to a different address without checks), liability may shift to the store.
- Product disputes. If the customer claims an item never arrived or was not as described, the service may pause the payout while it investigates.
Merchant fees
BNPL fees are usually higher than card processing fees because they include credit risk and the cost of money. The actual rate depends on:
- the plan length: longer plans cost the store more;
- the product category and return rate;
- the store's volume and negotiating position;
- who pays the interest: an "interest-free" plan for the customer is funded by the store.
Run the numbers per category: for low-margin goods a high fee can wipe out the profit.
Effect on average order value
Installments lower the pain of paying: a customer finds it easier to commit to an expensive item or add one more product when the widget shows a small monthly amount. That is why stores usually add BNPL to raise average order value and conversion in higher-priced categories.
Only an experiment shows how well it works for you. Compare average order value, conversion and return rate before and after launch, and always net of the fee.
How to add installments to checkout
Services usually offer several integration points:
- Product page widget: "from N per month" under the price. It works as an argument before the cart.
- Payment method at checkout: a separate option next to card payment.
- Redirect or modal where the customer is checked and accepts the terms.
- Webhooks for the outcome: approved, declined, cancelled, refunded.
Technically this resembles a payment gateway integration: the store creates an order through the service's API, sends the customer to confirm and waits for the notification. Plugins for popular CMS platforms often exist; a custom platform needs an API integration.
Do not forget to:
- show current terms from the service's API in the widget, not hard-coded ones;
- not ship until the service confirms the deal;
- sync full and partial refunds with the service;
- send cart contents if the service needs them for its checks.