What Is Afterpay & How Does It Work For Business?
Buy now pay later providers like Afterpay make it easy for your customers to finance large purchases and may increase your bottom line.
Buy now, pay later options allow shoppers to buy what they want now and pay in installments, adding another layer of flexibility throughout the online shopping experience. Merchants who offer customer financing like BNPL to their customers see an overall increase in sales, and larger purchase amounts. Customers are also less likely to abandon their online shopping carts, since they aren’t shocked at the amount of money they have to put down upfront when they confirm their order. Offering customer financing programs can be stressful, though. This is especially true for smaller businesses that don’t have the administrative resources to monitor customer repayment plans.
Afterpay is one of several popular BNPL providers that offer short-term loans to your customers and pay you the total purchase price upfront, taking on all the financial risk for merchants. Read on if you want to know how Afterpay works, how it’s different from other BNPL options, and whether this BNPL solution is the right one for your eCommerce business.
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What Is Afterpay?
Afterpay is a buy now, pay later option that allows users to make a purchase, then pay for it in four biweekly installments, without needing to go through a credit approval process. Afterpay pays participating merchants the total purchase amount upfront, minus merchant fees.
Why Use Afterpay At Checkout?
The world of eCommerce is now laser-focused on the consumer experience, which makes sense, considering how many alternatives are available online. Buy now, pay later is appealing for your consumers because it adds a layer of flexibility in terms of payment options. Flexibility, and the ability to put less money down at the time of purchase, make consumers feel more comfortable with a larger purchase price.
Buy now, pay later also helps individuals budget for their expenses. One-time purchases, whether small or large, are now just bills to fit into the monthly budget, much like a Spotify or Netflix subscription. Millennial and Gen Z shoppers, who are used to subscription-based bills, are much more open to short-term financing options like this.
Afterpay does not conduct any credit checks like providers such as Klarna and PayPal Pay In 4 do. This allows your business to reach customers who may not have the best credit scores, but are ready to finance their purchases.
According to a September 2021 study commissioned by Afterpay and prepared by Accenture, Afterpay has:
- Increased the average online shopping cart size by 17% compared to pre-Afterpay levels
- Helped merchants increase their profits by 11% compared to pre-Afterpay levels
- Connected the average merchant with 13% more new customers
- Generated $8.2 billion in total sales for 26,000 U.S. merchants in 2021
Afterpay is the second-largest BNPL provider in the U.S., with 5.6 million retailers using the BNPL option in 2020, so the average user is more likely to recognize the provider. You won’t have to market the payment option as much as you would have to with other BNPL providers.
Whether your customers using Afterpay repay their purchases in full or miss payments, merchants are always paid the entirety of the purchase price upfront, minus Afterpay’s merchant fees. Fees include a flat rate of $0.30 and a variable 4-6% commission rate per transaction completed with the BNPL provider. If you’re not sure whether the fees are worth it, check out our post, Adding Buy Now, Pay Later To Your Website: Does It Help Or Hurt Your Bottom Line?
There are a few downsides to offering customer financing through Afterpay. Unlike BNPL providers such as Affirm, Afterpay charges late fees for missed payments, and the late payment structure is not very well understood. Users risk being charged with both late fees and NSF fees from their bank in the event that Afterpay automatically tries (and fails) to withdraw an installment payment from their account.
Customers also do not know upfront how much credit they will be approved for when they apply for a short-term loan, so they’re not sure whether Afterpay will cover the entirety of the purchase they want to finance.
On the merchant end, the merchant acceptance process is not very transparent, so some sellers are denied access to the service without understanding why. The merchant payout process may take longer than it does for other BNPL providers. Also, variable fees are dependent on sales volume. If you are a smaller retailer, you may pay more than you would pay other BNPL providers in commission fees.
How Does Afterpay Work For Customers?
At checkout, your customer applies for a short-term Afterpay loan. They are approved for a certain loan amount, which may or may not cover the entirety of their purchase amount.
Here is an example of how the Afterpay application process works for your customers.
Step 1: Your customer selects Afterpay out of the available payment options at checkout.
They will see a breakdown of the standard payment schedule. The first installment, which is typically 25% of the purchase amount, is due at the time of purchase.
Step 2: Shoppers are redirected to Afterpay’s payment portal. People who already have Afterpay just need to enter their email to log onto their account. New users need to create an account.
Afterpay asks your customer for their phone number, then sends a one-time verification code. New users will enter their full name, address, and date of birth to complete their signup.
Step 3: Upon signup, Afterpay preapproves your customer for a certain loan amount. Afterpay does not conduct any credit checks, so they approve user loan amounts based on how long a user has been using Afterpay, the number of on-time payments they have made, and how many Afterpay loans they are currently repaying.
Because a user’s likelihood to repay loans is based mostly on their Afterpay history, new users are only eligible for smaller loan amounts. The longer a customer uses Afterpay, though, the more they can spend on a single order.
If your customer is not approved for a loan large enough to cover their entire purchase amount, they will need to pay a larger first installment at checkout.
Step 4: Your customer chooses a form of payment. New users enter information from a debit card or a credit card, while existing users can choose from a saved payment method. This makes checkout fast and easy.
Step 5: Your customer confirms their purchase, including the initial payment due at checkout. Then, they are redirected from the Afterpay portal back to your website’s payment confirmation page.
Installments are automatically charged to the card your customer used at checkout every two weeks.
If an automatic charge fails:
- Afterpay will try to take the installment payment from any other payment method your customer has on file.
- If the installment is still unpaid, your customer has up to 10 days to pay the installment manually.
- If they do not pay within this grace period, your customer will be charged a late fee of $8 or 25% of their purchase amount, whichever is less.
- Customers will not be able to use Afterpay for any more purchases until any and all late installments are paid.
- Late payments may hurt a user’s chances of being approved for a loan, or lower the maximum loan amount they can get approved for.
As of 2021, customers can change a payment due date once to avoid late fees, but only in certain situations. Changes must be made more than 24 hours before their payment is due.
A user may also be charged nonsufficient funds (NSF) fees by their bank if an Afterpay automatic payment charge fails.
Be sure to make possible late fees as transparent as possible to your customers, so they don’t feel blindsided in the event that they miss a payment.
How To Add Afterpay Buy Now Pay Later To Checkout
To add Afterpay to your online checkout, apply for an Afterpay merchant account.
Afterpay merchants may only sell goods, not services. Merchants selling electronics, medicines, dangerous goods, or goods that customers need to be 18 or older to consume will be denied by Afterpay. If your customers will not receive their products within 14 days, you will not qualify for Afterpay merchant services. This is to reduce the amount of “risk” Afterpay takes on.
Once your merchant application is accepted, integrate Afterpay and Afterpay on-site messaging to your website.
If your store lives on WooCommerce, Wix, Squarespace, Stripe, or any of these major eCommerce platforms, Afterpay has a ready-made integration for your site. You can add Afterpay as a payment method, just like other payment gateways such as PayPal. Simply log onto your website’s admin portal and add Afterpay as a payment method.
Adding Afterpay To A Square Store
On August 1, 2021, Square Inc. announced that it would acquire Afterpay by the end of the first quarter in 2022. Square plans on integrating the BNPL solution into its Seller ecosystem. The Seller ecosystem combines hardware, software, and financial services to help merchants manage their business. Square plans on offering Afterpay to businesses of every size.
Right now, Square has its own BNPL solution, Square Installments. However, Square Installments is only available for customers with purchases between $150 and $10,000. With Afterpay, Square store owners can offer customers a way to pay for smaller purchases over time.
Afterpay does not currently integrate with Square stores, but by mid-2022, the BNPL solution will be readily available for Square store owners.
How To Add Afterpay To A Shopify Store
Step 1: Navigate to the Afterpay Shopify installation guide on Afterpay’s developer site. There, you will find a link that will take you to the Afterpay payment gateway installation page. Once you’re there, you will log onto your Shopify account.
Step 2: Connect the Afterpay app to your Shopify store.
Step 3: Shopify will ask you to grant Afterpay permission to process orders as well as refunds. Click “Install App.”
Step 4: Select the country your Afterpay account is associated with (Afterpay is available in the U.S., U.K., Australia, New Zealand, and Canada), then verify your identity with the email or merchant credentials associated with your account.
After you log onto your Afterpay account, you will be redirected back to your Shopify payment settings page.
Step 5: Click “Activate Afterpay (New)”.
Do not enable test mode when you activate Afterpay, or the integration will not work.
Afterpay has very recently designed a Shopify on-site messaging app for U.S. Shopify store owners called Afterpay Attract. Simply install the app, edit the messaging within the app, and launch the app on your live site.
Should You Add Afterpay To Your Shop?
BNPL options are expanding, especially in the online marketplace. They are most widely used by millennial and Gen Z buyers, so they are only set to grow in popularity in the coming years. BNPL services are a must-have if you want to increase your overall sales, decrease online cart abandonment, and stay competitive in the eCommerce space.
If your online store caters to younger buyers who may not have good enough credit to be approved for a short-term loan, and your average order amounts do not exceed $2,000, Afterpay may be the right BNPL provider for your business. Afterpay only works with businesses selling physical items that will ship quickly. If your store offers pre-orders or items do not ship quickly, you may not get approved for Afterpay.
Right now, the BNPL provider asks for your average order volume and annual sales volume, so you may not get approved if your business is not very well established. This may change with Square’s acquisition of Afterpay, though. Smaller businesses are charged higher commission rates compared to larger ones.
Take all of this into consideration when applying for an Afterpay merchant account.
Afterpay most commonly works with eCommerce businesses selling “nonessential items” such as clothing and makeup. If your business sells “nonessentials” like these, Afterpay might be the best choice for your BNPL needs.