Merchant-funded BNPL: How it works and why it appeals to merchants and PSPs

The Buy Now, Pay Later (BNPL) market has seen significant growth, with 46% of the top 1,000 retailers now offering BNPL options, according to NMI. Among the BNPL models that have emerged, is merchant-funded BNPL. But what is this model exactly? How does it operate, and why is it particularly attractive to merchants and payment service providers (PSPs)?

Understanding merchant-funded BNPL

Merchant-funded BNPL allows customers to make purchases on credit at the point of sale, with financing provided by the merchant itself or by a third-party lender contracted by the merchant. Typically offered as a white-label solution, this model enables merchants to brand their own BNPL offerings. Essentially, the merchant becomes the BNPL provider, while a PSP manages the technical backbone of the service, in essence delivering BNPL-as-a-Service. This set-up ensures that consumers interact only with the merchant's brand during their purchase process, creating a seamless and cohesive experience. Some payment service providers may have the capability to issue cards, in which case merchants may wish to link a card to their offering, essentially providing a BNPL store card.

The merchant-funded BNPL model has significant appeal, especially in today's competitive retail landscape. According to CNBC, offering BNPL options can increase the likelihood of a sale by 20-30% and boost the average ticket size by up to 50%. This increased sales potential has prompted many merchants to launch their own BNPL offerings using this model, such as Next with next3step and Very with VeryPay.

How merchant-funded BNPL works

Here’s a closer look at what a typical payment using this model involves:

1. Initial purchase: The customer selects the items they would like to purchase from a merchant, adding the items to their shopping cart (physical or e-commerce) and opts to use BNPL at the checkout
2. Account setup and approval: If it’s the customer's first time using BNPL with this merchant, they create an account and the merchant or third-party lender conducts a credit check to assess the customer’s eligibility
3. Choosing an instalment plan: After approval, the customer selects an instalment plan tailored to their preferences. This can typically be done either during the checkout process. Options may include various terms such as pay later, pay in 3, pay in 6, or pay in 12 months, each with different interest rates and fees depending on the merchant's offerings
4. Transaction completion: Once the instalment plan is confirmed, the customer's repayment cycle begins according to the chosen plan, with payments made directly to the merchant or lender at regular intervals
5. Returning customers: For subsequent purchases, returning customers simply log into their existing BNPL account and select their preferred instalment plan

Throughout the entire process, customers have the flexibility to manage their repayment schedules and monitor their transactions through the merchant’s user-friendly interface. 

Merchant-funded BNPL is just one of many innovative models transforming the BNPL landscape. Its seamless integration with merchant checkouts and POS terminals, combined with the convenience it offers customers, makes it an attractive option for merchants and PSPs looking to expand their services. However, this is only one piece of the puzzle. Numerous other BNPL models exist, each offering unique benefits tailored to different business needs. To explore these options and determine the best fit for your business, be sure to check out our ultimate guide to BNPL.

Other blogs in this series: Card-linked BNPL | At-purchase off-card BNPL | Post-purchase off-card BNPL