A new payment method – Buy Now, Pay Later or BNPL – is gaining popularity in the world. Consumers like BNPL for its simplicity, speed and the absence of interests (as opposed to traditional installments and credit cards), and eCommerce sites choose it for AOV growth and impulse buying. In this article we share, what are the risks of BNPL and how the new payment method affects the eCommerce market.
How BNPL works from the consumer side
Today, BNPL services are provided by dozens of large fintech companies and small startups: Affirm, AfterPay, Four, Klarna, Sezzle, Zip, etc. Each platform has its own conditions, advantages and disadvantages. Let’s examine how these services work.
- When placing an order on an online store, the customer selects the BNPL method and its rate. Most often, it is proposed to divide the payment into 4 or 6 equal parts, the first of which must be paid to receive the product, and the remaining – every 2 weeks. Some services offer a 48-month plan (Affirm) and some only offer a one-month plan (Klarna).
- After choosing a rate, the customer leaves the credit card data, makes the first payment and waits for the order.
- Every 10, 14, 30 days (depending on the service and plan), equal shares for purchases are automatically withdrawn from the customer’s card until the debt is fully paid.
- Most platforms do not charge a commission from the customers with a timely return of 100% of the cost of the purchase. But in case of late payment, all services take a percentage from (although PayPal and Klarna have recently abandoned such penalties).
How BNPL works for retailers
- The online store enters into an agreement with a BNPL company and integrates the payment instrument on its website.
- After making a purchase, the store receives the full amount for the product from the platform – usually within 3 days.
- The seller pays a commission to the service for the transfer of each share. For example, Sezzle charges retailers 6% + 30 cents from each transaction – this is the average level in the market.
BNPL benefits for consumers
Consumers like BNPL for several reasons: financial flexibility to avoid credit card payment, and the wish to buy items that are out of their budget. Let’s compare BNPL with other types of loans popular in the US.
- POS lending requires more frequent credit card checks and charges higher interest and late fees than BNPL. Most often, POS lending is used when buying expensive goods.
- The reserved goods (Layaway) are taken by the client only after the full payment of the order, while BNPL allows customers to receive the product after the first payment.
- Credit cards are inferior to BNPL in terms of interest rate and complexity of registration. According to a recent C+R Research survey, 56% of BNPL users prefer this method to credit cards, and 38% of those surveyed are convinced that BNPL will soon replace credit cards altogether.
The Bank of America report says that by 2025 the BNPL market will increase 10-15 times. And according to FIS Worldpay, BNPL is the fastest growing eCommerce payment method in the world.
Benefits of BNPL for retailers
For retailers, the benefits of BNPL are even more obvious. RBC Capital Markets estimates that BNPL raises retail conversion rates by 20-30% and increases the Average Order Value by 30-50%. For example, women’s clothing store Rue21 saw a 73% increase in the average check after integrating BNPL with the Klarna platform. Here are some other benefits:
- Impulse buying. The introduction of the BNPL is becoming a decisive factor for buyers in the impulse buying that any retailer is chasing. If the client has the opportunity to divide $300 into 6 equal payments for 2 months, it is more likely that he or she will buy the favourite product.
- Increase in repeat purchases. Affirm says that online retailers that partner with the service see 20% of repeat purchases using BNPL (and an 85% check increase). In addition, McKinsey found that BNPL encourages users to use the service 15 to 20 times a year and access apps 10 to 15 times a month.
- Attracting clients. Major retailers acknowledge that BNPL is attracting new customers. For example, Macy’s CEO Jeffrey Jennett recently said that thanks to the collaboration with Klarna, they continue to see an increase in the number of new young customers, 45% of whom are under 40 years old.
- Trend following. Over the past year, BNPL payment services were integrated by almost all major American retailers: Amazon, Walmart, Kroger, Target, Apple, Nike, Adidas and others.
Like any fast-growing industry, BNPL carries many risks for both buyers and retailers.
- State regulation. BNPL is technically a loan subject to the same rules as banks and microfinance institutions have. Some services hide percentages in the cost, and some do not inform about fines, thereby violating consumer rights. In the UK and Australia, bills are already being developed to regulate the activities of such services. In addition, stores that cooperate with BNPL platforms are suspected of unjustifiably raising prices.
- Late payments. Over the past 2 years, 43% of BNPL users are in arrears. Two-thirds of them, however, said it was because they forgot to transfer money or find an account, and only a third cited lack of money as the reason. This trend could lead to tighter loan terms from BNPL platforms.
- Complicated returns. When paying using BNPL, users often encounter difficulties trying to return a product. Some platforms themselves take over the entire return process, while others shift the responsibility to retailers.
Now let’s look at how the BNPL payments can evolve in 2022.
- More and more BNPL platforms are preparing to enter international markets. So, in September 2021, the American Affirm announced this, and the Swedish Klarna and Australian Afterpay entered the American market.
- BNPL services will gradually turn into online retailers, offering users to choose stores that cooperate with the platform and buy products directly in the application.
- BNPL companies will enter new markets for themselves. For example, Scalapay began to cooperate with jewelry and luxury stores in Italy.
To keep up with the times, it is worth considering convenient payment conditions for your customers right now. Despite the risks of introducing BNPL, this strategy is already being implemented in eCommerce. Our clients are proof of this. If you also want to increase the average order value and improve the shopping experience in your store, feel free to contact us for integration. We will help you solve the technical side of integration with the BNPL service of your choice, connecting the payment method quickly and seamlessly.