From Shopify partnering with Affirm, to companies like AfterPay seeing a 263% gain year on year, if there’s one thing that’s for certain it’s that Buy Now Pay Later (BNPL) has exploded as a trend in ecommerce. It’s a hot button topic right now, especially in the run up to Black Friday/Cyber Monday, but what’s all the fuss about? Credit cards and financing have been around for decades, so why now and how is it different?
What is Buy Now Pay Later, and how does it work?
Well, it’s pretty much as it sounds! Customers at checkout are offered the opportunity to either pay for their order in full, or utilize a BNPL service such as Klarna or AfterPay to either split their order into 3 or 4 payments or choose a date to repay the order in full. Larger orders may offer monthly installments over a period of time, similar to financing. Customers are then sent reminders by the BNPL service until the order cost is received in full. BNPL is a sort of point-of-sale loan, making it easier for customers to make purchases without worrying about the immediate cost.
What’s the reason for its current growth?
There are a few factors that play a role in the popularity of BNPL options. The first is the ongoing situation with Covid-19. Online shopping has already seen a massive increase in the last few months due to people staying at home more, and Buy Now Pay Later options make it easier for customers to spread the cost of larger purchases they may be making. For example, brands like Peloton have seen a huge increase in sales over the past few months as people are staying at home to exercise. A Peloton isn’t the cheapest exercise bike on the market, so BNPL options make them more accessible to more potential customers. In times of economic uncertainty and people watching their monthly pennies, BNPL lowers the barrier to purchase.
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Another reason is simply the audience that Buy Now Pay Later attracts - Millennials and Gen Z. AfterPay recently noted that 65% of their US users were Gen Z, which may surprise some people. BNPL services are seen essentially as an alternative to credit cards, which can be difficult to acquire and expensive to maintain. Most BNPL offer low or even no interest fees, and are done per purchase. Younger customers are already more likely to shop online, and the alternative to conventional debt is seen as a safer option in a world where they’re already saddled with massive debts like student loans.
How will BNPL affect Black Friday/Cyber Monday?
Let’s go back to that “barrier to purchase” we mentioned earlier. Black Friday/Cyber Monday (BFCM) is seen for many as the start of the holiday shopping season - and let’s be honest, 2020’s BFCM season is starting in October with Amazon launching Prime Day on October 13. People can get all their big ticket purchases at a discounted price, readying them for the holidays ahead of time. However this year BFCM is a little different. The ongoing pandemic has caused a lot of uncertainty, and this extends to people being more careful with how they spend their money. Spending a lot of money all at once during BFCM is a daunting prospect for some, wondering how they can make it work. Buy Now Pay Later essentially allows people to spread the cost of their BFCM purchases, making big ticket items more affordable and smaller purchases less likely to feel like they’re stacking up too quickly.
What are the benefits of BNPL?
Increased Sales and Less Abandoned Carts
We’ve mentioned a couple times that BNPL can lower the barrier to purchase for customers, and that’s a big benefit to businesses as it can lead to increased sales. Particularly if your products are more of a financial investment, or seen to be on the pricey side, it can open you up to more customers who maybe can’t afford to buy your products outright but could if payment installments were an option. 30% of shoppers who have used BNPL say they wouldn’t have made the purchase if installments hadn’t been an option.
On top of increased sales, it can also lead to fewer abandoned carts. More than two-thirds of carts are abandoned, with a large factor being the total cost. Customers get to checkout, see how much their items actually cost, and decide against the purchase. BNPL can be an attractive option to customers who are interested in the products, but would prefer to spread the costs.
Higher Customer Lifetime Value (LTV)
A positive purchasing experience is your best bet at repeat customers, and offering additional payment options like BNPL can add to that experience. You’re offering customers more flexibility and accessibility, which is always attractive to new customers. If you sell big ticket items, they’re more likely to come back to your store next time they need a similar product as they’ve had such a great experience and can rely on your store to give them a flexible payment option.
Attractive to Younger Audiences
Attracting Millennials and Gen Z is a big audience goal for many brands, and BNPL can potentially bring them to your brand over your competitors. Given the main users of BNPL are younger people, offering it as a payment option at checkout and advertising it on product pages may swing their favor toward your brand if they’re researching brands to buy from. With Millennials making more and more of their purchases online, it makes sense to open your brand up more to them and make it even easier for them to buy from your store.
Makes Brands More Affordable/Accessible
In short, BNPL increases customer purchasing power in a significant way. The affordability and accessibility of brands is something we’ve touched on a few times already, but it’s one of the biggest benefits to customers using BNPL. Being able to spread the cost of a purchase over a few weeks or months is much more attractive to customers than one big payment they can’t afford all at once. This opens more brands up to customers, especially if those brands are more expensive such as technology, luxury goods, furniture, etc. But this extends to brands with smaller individual product costs too such as apparel, food and drink etc. Customers for example can get their summer wardrobe, and spread the cost over a few payments.
Improves the Customer Experience
Improving your customer experience is always about removing as much friction as possible, and one of those friction points can be the cost. A one-off purchase of $200 can be a shock to the wallet, but four payments of $50 spread out over a few weeks or months is a lot less painful for most customers. Offering an installment option can remove that shock from the purchasing process if you make it clear at checkout that they can make a one-off payment, or the installment cost and over what period of time if they choose instead to opt for BNPL.
What are the concerns around BNPL?
There are of course a few criticisms laid against Buy Now Pay Later options. The major one being that BNPL can be seen to be predatory - it’s a debt, but without making it obvious to the customer. It’s marketed as being an easy way to afford what you want, but you’re accruing a debt in the process. The counter to this argument is that in fact, customers are aware of the fact it’s a debt and the companies who offer this service make it clear to understand their terms and the conditions of sale. The alternative to BNPL is to take out a conventional loan or apply for a credit card, but often these carry heavy interest fees or encourage people to buy higher priced items all at once when they really can’t afford them. A major benefit of using a BNPL option is that there are usually little to no interest fees, and the payments expected are clear so you can actually make a conscious decision then and there on if you can afford the payments.
Another other major criticism is going back to young people using BNPL. When you’re buying a house, applying for a loan, or any other major financial decision, you need to have a good credit score. Buy Now Pay Later repayments can still have an effect on your credit score, so paying late on purchases can have a negative impact. On the other hand, paying on time can positively influence your score.
And finally there’s the potential negative attitude towards spending that BNPL can encourage. We’ve all had that moment of wondering how you’ve spent so much money and then looking at your outgoings and seeing $10 here and $25 there...it all adds up! The same goes for customers who may overuse the convenience of BNPL and accrue a large balance, and not necessarily all with the same BNPL provider. It’s up to the customer to keep their spending in check, but for some this may be difficult to keep track of unlike a credit card with a balance cap.
How can I offer BNPL in a responsible way?
If you want to start offering BNPL but are even a little concerned about the criticisms levied against it, then there are ways you can have the option and add in extra steps to ensure you’re being responsible to your customers.
Minimum spend amounts
If you’re concerned about the idea of customers racking up lots of little BNPL payments, then an easy way to combat this is to make sure there’s a minimum spend on an order to be eligible for BNPL. That way your customers will be encouraged to make a more considered decision.
As well as the BNPL provider sending emails about the BNPL payments, you can also give a little bit of insight to your customers. Provide clear and easy-to-find links to information about your chosen BNPL partner, both on checkout pages and any other pages you advertise the option. Send out an email campaign every now and then explaining how BNPL works, the relationship your brand has with the provider, and any other information you feel your customers should be aware of. This has an added bonus of letting your customers know that you offer BNPL as a payment option, as well as letting them know the ins and outs.
Where can I get started?
We recommend comparing a few of the BNPL options to see which one will be the best fit for your business. Keep in mind that they have different transaction fees on the merchant side, which is often slightly higher than a credit card transaction fee. Here are some BNPL services to help you begin your research (in alphabetical order):