How to Build and Scale a BNPL

(Buy Now, Pay Later)
Under 6 Months

In recent years, the Buy Now, Pay Later (BNPL) concept has taken the fintech industry by storm, revolutionizing how consumers purchase. This innovative payment solution allows customers to defer payments for their purchases, giving them more flexibility and control over their finances. BNPL has become increasingly popular among consumers, especially younger generations, who prefer to avoid traditional credit cards and loans.

Some major banks and financial institutions have acquired or partnered with BNPL companies to enhance their payment offerings and stay competitive. For example, in 2020, PayPal acquired the BNPL provider "Buy Now Pay Later" in Australia. JP Morgan Chase partnered with the BNPL company "Affirm" to offer its customers an alternative payment option. More recently, in 2021, Square Inc. announced its acquisition of the BNPL provider "Afterpay" for $29 billion, marking one of the biggest deals in the BNPL industry.
However, building and scaling a successful BNPL solution has its challenges. It requires a deep understanding of consumer behavior, risk management, and technology. This article aims to provide a comprehensive guide for businesses looking to build and scale their BNPL solutions. We will cover everything from the key features of a successful BNPL solution to its implementation steps.

Whether you are a fintech startup or an established business looking to diversify your payment options, this guide will provide you with the knowledge and tools to create a successful BNPL solution within a short timeframe.
User Flow
The user flow of a BNPL payment option typically begins when a customer visits a merchant's website or store and selects the BNPL payment option at checkout. The customer is then redirected to the BNPL provider's platform to complete the payment process.

To use the BNPL service, the customer must sign up and provide their personal and payment details, such as name, email address, and billing information. The BNPL provider may also require the customer to provide additional information and documents for Know Your Customer (KYC) purposes, such as a government-issued ID or proof of income.

Once the customer has completed the sign-up process and submitted their documents, the BNPL provider will review their application and decide on whether to approve or disapprove the customer's credit limit. The decision is based on various factors, such as the customer's credit history, income, and payment behavior. If approved, the customer will receive a credit limit to use to make purchases with the BNPL service.

After the customer has purchased using BNPL, they must make repayments every two weeks, either manually or through automated payments. The customer will have the option to repay the total amount early or in installments, depending on the terms and conditions of the BNPL provider.

Overall, the user flow of BNPL payment options aims to provide customers with a seamless and flexible payment experience while ensuring that the provider manages risk effectively through proper KYC and credit limit decisions.
Unit Economics
The unit economics of BNPL services are crucial for the sustainability and profitability of providers in this space. The core idea behind most BNPL solutions is that they offer interest-free or low-interest loans to customers but with a relatively high rate of defaults.

To offset the risk of defaults, merchants typically pay a premium to the BNPL provider. This premium must be greater than the expected default rate, and it's the primary way BNPL providers cover their costs and profit.

However, there are additional ways in which BNPL providers can offset costs and generate revenue. One way is to add customer fees, such as premium subscription fees or additional purchase fees. As long as these fees are not progressive interest rates, they can still be marketed as interest-free loans to customers.

Transaction fees, such as payment gateway fees, are typically covered by the merchant or the customer. These fees are essential to factor into the unit economics of a BNPL solution, as they can affect the overall profitability of the business.

While there's always a share of late payments in the BNPL industry, only a smaller percentage of customers will never repay anything (the share of loans that are past due but have not yet reached the point of default is known as the delinquency rate). By factoring in the late payment rate into their business plan, BNPL providers can add additional revenue streams from late fees.
So, the unit economics of BNPL solutions involves balancing the costs of defaults, premiums, and transaction fees with the revenue generated from merchant and customer fees and late fees. By carefully managing these factors, BNPL providers can build a sustainable and profitable business model.
Refer to the table below and check out the example BNPL metrics:

Table 1. Key Unit Economics Metrics for BNPL Providers.
Research shows that Affirm, one of the three major players in the BNPL industry, along with Klarna and Afterpay, has various models for customer loans. Unlike some competitors, Affirm offers traditional loans with non-zero Annual Percentage Rates (APR), which may contribute to their more robust financial performance.

Comparing the rates and models of the Big 3 BNPL providers against their annual revenues and expenses can provide a clearer picture of their relative strengths and weaknesses. It's important to note that each provider has its unique business model and strategies for generating revenue and managing risk.
Despite the differences in their approaches, all three companies have been able to capitalize on the growing popularity of BNPL services among consumers. As the industry continues to evolve and expand, it will be interesting to see how these companies adapt and compete in the coming years.
Table 2. A Comparison of the Big 3 BNPL Providers: Features and Finances"
Note: The revenues and expenses listed here are approximate and may vary depending on market conditions, competition, and regulatory changes. It's also worth noting that these figures only represent a snapshot of the companies' financial performance and may not reflect their long-term growth potential.
Partners and Supply Chain
One crucial aspect of building and scaling a successful BNPL solution is having a solid partner network and a reliable supply chain. The licensing partner is at the heart of this network, typically a combination of a debt facility provider and a payment processor sharing a banking license. The debt facility provider is usually a bank or a market-making institution that provides the debt facility for users. At the same time, the payment processor handles the transactional aspect of the BNPL solution. Popular payment processors include Stripe, Square, and Braintree.

In addition to licensing partners, technical partners are also essential for the success of a BNPL solution. While the team's core members should be in-house, additional platform developers, digital marketers, and DevOps professionals can be outsourced or offshored to help with the technical aspects of the solution. A critical aspect of the technical partner is the API/SDK for ID verification, which is essential for meeting KYC regulations.

By building a solid network of partners and suppliers, BNPL providers can ensure that their solutions are scalable, reliable, and compliant with regulations. Working closely with partners can also help BNPL providers to keep up with changes in the industry and to stay competitive in a rapidly evolving market.
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Trusted BNPL Partners with Affiliate/Referral Opportunities
It's important to note that affiliate/referral opportunities may vary and are subject to change over time. It's always a good idea to do your own research and due diligence before entering into any affiliate or referral agreements.
Customer Experience and Targeting
To build a successful BNPL platform, it's essential to understand the importance of targeting specific user demographics and partnering with the right merchants. This means creating a resource-driven strategy, identifying merchants in your target area and online that you can partner with, and marketing your service or targeting your features to their specific demographics.

When it comes to platforms, there's a strong case for using e-commerce integrations for online indie merchants, native mobile apps for physical shops, and web apps that are accessible to everyone. Each platform offers unique benefits and can help you reach different types of customers.

Additionally, it's important to consider the merchant experience as well. Merchants may want to see the business you're bringing them and be offered a dedicated merchant dashboard to help them manage orders, payments, and other aspects of the customer experience. By keeping customer and merchant experiences in mind, you can create a BNPL platform that meets the needs of everyone involved.
Back Office
To ensure a successful BNPL solution, having a well-structured back office is key. The core team should comprise internal tech leads, a product and analytics person, and account managers for each merchant partner. Having dedicated customer support reps is essential to ensuring a seamless customer experience.

In terms of tech infrastructure, utilizing serverless containers (e.g. AWS Lambda or Azure Functions) for each service can be a game-changer. This allows for better scalability and flexibility, as well as more efficient resource allocation. A solid tech foundation allows the back office to operate smoothly and seamlessly, allowing for faster decision-making and problem-solving.

For instance, a BNPL provider can utilize serverless containers to process user requests. With serverless containers, the provider can easily scale their infrastructure up or down depending on the volume of requests. Such as, during peak hours such as Black Friday, when the provider expects an influx of user requests, the serverless container can automatically scale up to handle the increased traffic. This means that the provider does not have to worry about maintaining servers and can focus on providing a seamless experience to their customers.

Another important factor to consider is the security of customer data. Implementing best-in-class data security measures, such as encryption and multi-factor authentication, is crucial in protecting customers' sensitive information. Having contingency plans for potential data breaches or system failures is necessary to ensure business continuity.
Compliance is a critical aspect of operating a successful BNPL business. Firstly, KYC should be mandatory for all users to comply with regulations and prevent fraud. Additionally, GDPR (General Data Protection Regulation) and data policy regulations must be followed to ensure the privacy and security of user data.Book design is the art of incorporating the content, style, format, design, and sequence of the various components of a book into a coherent whole. In the words of Jan Tschichold, "methods and rules upon which it is impossible to improve, have been developed over centuries. To produce perfect books, these rules have to be brought back to life and applied."

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Furthermore, it is crucial to obtain the appropriate licenses to operate a BNPL business in the US, EU, and UK. In the US, licenses may vary depending on the state, but it's common to require a money transmitter license or a lending license. In the EU, the European Banking Authority licenses companies to operate as payment institutions or electronic money institutions. In the UK, a BNPL provider may require authorization from the Financial Conduct Authority (FCA).
It's essential to have a legal and compliance team that is up-to-date with the latest regulations and guidelines in the countries where the BNPL business operates. These teams should ensure that the BNPL provider complies with all regulations to avoid potential legal issues that could negatively impact the business.
BNPL: What You Can Build in 6 Months
Building a BNPL solution may seem daunting, but with the right approach and resources, it can be accomplished within a relatively short time frame. To ensure the success of your project, focus on developing core features essential to the BNPL user experience.

Some must-have features include:

  1. Payment options - users should be able to choose from various payment plans and schedules that suit their needs.
  2. Credit checks - performing credit checks on users ensure that they are capable of making repayments.
  3. Integration with merchant platforms - seamless integration with merchant platforms enables smooth transactions and ensures timely repayments.
  4. Customer support - providing reliable customer support maintains user satisfaction and resolves any issues that may arise.
  5. Security measures - strong security measures must be in place to protect user data and prevent fraud.
With these features in mind, a BNPL solution can be developed within six months. The timeline may look something like this:
With these features in mind, a BNPL solution can be developed within six months. The timeline may look something like this:

Month 1-2
Planning and research, identifying the target audience and merchant partners, defining core features, and developing wireframes

Month 3-4
Building the MVP (minimum viable product),
including payment options, credit checks,
and integration with merchant platforms

Month 5
Adding customer support features
and implementing security measures

Month 6
Testing and refining the product,
preparing for launch, and ensuring compliance
with relevant regulations
Wrapping Up
Building a successful BNPL platform requires careful planning and execution across multiple fronts. From identifying the target audience and merchant partners to selecting the right technical and compliance partners, each step of the process is critical. Moreover, a well-designed customer experience, a robust back office infrastructure, and strict compliance with KYC and data privacy regulations are all essential components of a successful BNPL platform. With the right resources and focus, it is possible to build a BNPL platform with must-have features within six months. However, it is important to stay agile and adapt to changing market conditions to stay ahead of the competition.
See also