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As e-commerce consumers reach the checkout page to convert from shopper to buyer, they’re increasingly finding an interesting little box. It’s here they can either enter their card information, as usual, or pay for their purchase over a series of weeks or months, interest free.
Buy Now Pay Later (BNPL) is a retail trend that promises to explode and change the way consumers manage their purchasing decisions for a long time to come. In January and February of 2021, year-over-year growth of BNPL was a phenomenal 215%.
Among the big players in BNPL are Klarna, Affirm, Afterpay, and PayPal. Apple is supposedly planning a BNPL service, too. Klarna alone reported that since June 2020, its users have doubled and the company’s retail partnerships have risen 132%. It’s estimated that as much as $10 billion in e-commerce revenue has passed through BNPL providers.
The pitch to consumers to use BNPL is an easy one. Why use up some of your credit card’s limit on this purchase or deplete your bank account in an uneasy economic environment? By clicking this box, you’ll get an interest-free loan.
BNPL advertising promotes convenience and ease-of-use to help one’s budget and manage uneven cash flows. This is especially helpful to younger consumers who likely participate in the gig economy and find their incomes vary month to month. While this would appear to be a service aimed at people with limited credit, that’s actually not the case. 65% of sales generated from BNPL are from consumers with a credit score above 700.
That payment flexibility is a major selling point for BNPL providers. At a time when consumers are unsure about the economy, these services provide a “third way to pay” beyond cash and credit. Affirm allows users to stretch out their payment terms from three months to four years with a variable interest rate based on their creditworthiness.
Sezzle, another player in this space, gives purchasers six weeks to pay off their balance. It also offers the freedom to reschedule a payment once during the period. Users that suddenly find they can’t make a promised Sezzle payment don’t have to worry about a credit history ding or debt collection calls. They simply can’t use the service again until they square their account.
To make the system work, BNPL providers typically take a fee from the retailer for each sale. Some also charge consumers late fees if they fail to make their payments on time. They seamlessly integrate into the retailer’s payment page on their online storefront and have user-friendly functionality. Rather than filling out a lengthy credit application, the shopper generally provides their mailing address, email, contact number, and birthdate to be quickly approved. Some providers also do a “soft” credit check that doesn’t affect credit scores.
For retail brands, BNPL can be a profitable tool. Consumers wavering on a purchase because they feel it’s too big a chunk from their bank account but who also don’t want to add to their debt load may bite on the “pay later” third option. Klarna says that the average purchase size made through them is $150. Significantly for retailers, industry data says 18% of users increase their basket size.
In addition, consumers who successfully use the service are likely to do so again. BNPL providers keep up with users through email and SMS messages notifying them about special offers at participating brands. This creates a synergy that can help brands amplify their message.
To help attract both brands and consumers, many BNPL providers are ramping up their profiles by co-marketing events:
While BNPL would seem to be an online-only service, providers, retail brands, and the malls that need their tenants to thrive are looking into how it can be incorporated into the in-store experience. Providing BNPL flexibility at the POS, whether it’s at a counter or if the consumer is checking out with their own device using an app, gives consumers more payment options. This in turn diversifies a brand’s customer base by appealing to buyers who may have only shopped online.
As an example, Afterpay recently announced it was teaming with Westfield shopping centers in the U.S. to offer in-store BNPL service in four tenants: Lush Cosmetics, Aldo, The Children’s Place, and The Container Store. Consumers can receive an Afterpay card and use it at these retailers like a credit card.
After largely separating themselves from brick-and-mortar shopping, Afterpay believes consumers are itching to experience in-store shopping. Its survey shows that 63% of buyers look at shopping as a “treat.” Furthermore, nearly three out of four enjoy leaving a store with a bag. As consumers return to shopping centers, many will be exposed to BNPL for the first time. Providers are betting this is an experience that people will likely try at least once.
Do your typical consumers skew younger? It may be beneficial to add BNPL since 52% of buyers in the 18-24 category have tried one of these services. At the other end of the demographic spectrum, only 12% of people over 65 can say they have.
Additionally, the service tends to work well for mid-ticket products, around $100 to $500. It might also add value to retailers with a good upselling strategy.
If it sounds like BNPL would be a good move for your business, buy now, not later.