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This article is about customers splitting the payment on a single purchase, (e.g. making four payments of $25 rather than $100 up front.) In LMS, you can also split a payment between two or more linked accounts. If you're looking for that, see our articles Split a Payment and API – Split Payments.
Split Payment or Buy Now, Pay Later (BNPL) purchases aren't your typical loan. A buyer makes a single purchase, but can choose to make the payment in a few installments. Traditionally, interest and fees aren't charged for this, but the BNPL company pays the merchant a smaller amount for the item than what the customer will pay. This may seem different from a traditional loan where interest, underwriting fees, and down payments are often present. Despite these differences, LoanPro's Loan Management System (LMS) has customization options to make the software work flawlessly for these types of accounts.
This article will explain everything BNPL financiers will want to know about LMS: the essential setup for split-payment transactions, the API requests that can help them automate the process, and the other tools they can use to align the software with their business model and lending products.
BNPL Account Creation (Loan Creation)
BNPL companies might not think of themselves as a lenders, but as far as the LMS software is concerned, a split payment purchase is a loan. LMS refers to all of your accounts as loans, but with the right setup they'll function as split payments.
If you use the LMS UI, you'll want to set up a Pre-Configured Loan for each of your lending products. You'll arrange the loan setup once, and then can create any number of loans with that same setup. You'll also be able to change any details of the loan before activating it, so you can fine-tune the account to match a specific purchase.
With help from a developer team, you could also integrate with the LMS API. Your developers could engineer your origination or underwriting software so that those accounts automatically migrate into LMS. We have comprehensive, public documentation of our APIs, both here on loanpro.helpjuice.com and on loanpro.readme.io. Our article API – Create a Loan shows how to make a call that will create a new loan through the API that includes all the setup specifics for your lending products.
Merchant Discount Revenue (Discount Calculation)
Discount Calculation refers to the difference between what the customer pays the BNPL company and what the BNPL company pays the retailer or merchant. A buyer might agree to make five payments of $100 to the BNPL company, totaling $500, but the BNPL company may only pay the retailer $475. This makes up one stream of revenue for BNPL financiers, in addition to interest or late fees accrued when customers don't make their scheduled payments (see below).
LMS lets you select different methods of calculating that discount to provide flexibility in revenue recognition.
Merchant Tracking (Source Companies)
LMS's Source Company Manager is another versatile feature that BNPL financiers can use to organize and optimize their operations. The source company manager keeps track of the stores or locations where purchases happen and accounts originate. How you use source companies will depend on your business model.
If you are a retailer and BNPL financier, you can use the source company manager to keep track of different brick-and mortar locations. LMS users can be added to a specific source company as Employees, and you can even use the Cash Drawer and Vault to track cash transactions in the store.
If you are a BNPL financier who partners with retailers, then source companies will help you manage account origination. You can Create A New Source Company for any retailer you work with, and then link individual loans to those companies. LMS's new Enhanced Funding tool complements this style of BNPL financing by making it possible to directly send funds to a source company. For example, when a customer wants to purchase a television from an electronics store with split payments, you could send a direct deposit to the store once the purchase transaction is finalized.
Interest and Fees
BNPL's main appeal to customers is that they can avoid the additional costs that come with a typical loan or lease option; however, it's not uncommon for BNPL financiers to include interest or fees to incentivize customers to make their payments on time.
Charging interest or fees might mean your payment plan is legally considered a loan. That means the loans would be subject to consumer lending laws like Regulation Z and the Truth in Lending Act (TILA).
If you're considering added interest, fees, or other finance charges to a payment plan, you should discuss it with your legal team and make sure you're compliant with the law before extending the offer to any consumers.
If you charge fees for late or incomplete payments, LMS makes it easy to set up Automatic Late Fees. You can charge a percentage of the payment, a flat dollar amount, or the lesser or greater of those options.
You could also use Recurring Charges. Whereas late fees apply once per payment, you can set recurring charges to apply every day that it qualifies based on a rule you set. As with most LMS features, you can use the API to set Recurring Charges. Recurring charges would let you do something like charge $3 per day that the customer is late on a payment.
Alternatively, you could use our Escrow functionality to include fees as a part of the regular schedule, rather than assessing them in response to a late payment.
Fees and interest may be subject to laws specific to your operating jurisdiction.
LMS lets you Suspend or Resume Interest Accrual with the click of a button (or an API Request). You could simply turn interest on after the final scheduled payment, or after any grace period that you set up in your contract.
Better yet, you can use our Rules Applied to Stop or Resume Interest. With rules applied, you can set up automatic triggers in the system. You could set it so interest is initially turned off, but will turn on if the days or amount past due exceeds a certain level.
If your BNPL model adds interest after a fixed term or number of payments, then you could also Create a Schedule Roll to plan out payments. A schedule lets you specify different interest rates and payment amounts for single payments or groups of payments. Many traditional lenders, for instance, will use schedule rolls for promotional offerings, like an introductory interest rate or payment amount.
To configure a BNPL purchase, you would first create a line with no interest for all of the scheduled payments. The second line could add interest, and simply continue for as many payments are needing to pay off the remaining balance. LMS lets you create Schedule Roll Templates for your loan products, or set up Schedule Rolls with the API.
If you're worried about setting up BNPL accounts in LoanPro, rest assured that our support team will be there to assist or complete your configuration. They can also train you on using our system specifically for BNPL.