eCommerce

Trend Analysis: The Buy Now Pay Later Revolution

Among the ever-increasing selection of online payment options, there’s a new type of player you’ve probably noticed. The solution you’re offered is a function of where you are from and who you’re shopping with. 

Whether Klarna, Afterpay, Sezzle, the function of these payment platforms is the same: Consumers get the product immediately with a small down payment. Then, all they have to do is commit to a weekly payment plan.

Forget credit cards. This is the new way to finance online purchases. Welcome to the world of BNPL: Buy Now Pay Later.

What Is Buy Now Pay Later?

Direct-to-consumer (DTC) stores no longer have to rely on banks and credit card companies to make their products more affordable. Many are turning to fintech startups like Afterpay, Affirm and Klarna to offer consumer financing instead, writes eCommerce site designer Kristine Neil

There’s nothing new about payment plans in the retail sector, she notes. But unlike your Grandma’s layaway plan in which the store holds the product until it’s paid in full, Buy Now Pay Later consumers receive their orders immediately. 

There’s a lot to love about this payment model from the consumer’s point of view, says eCommerce writer Francesca Nicasio. They only need to pay a fraction of the price to receive the product immediately, and a lot of the time they don’t need to pay anything upfront at all. There’s often no interest, either, if the bill is paid on time. 

It’s a much more flexible payment option than credit cards, writes Maddy Gaiman, Manager of U.S. Partner Marketing at fintech company Klarna. Consumers can spread payments over a longer period than monthly credit card bill cycles, which is why interest-free installments are considered a consumer-friendly form of credit. 

A wallet filled with credit cards; Buy Now Pay Later concept

What Does Buy Now Pay Later Cost DTC Stores?

If the consumer doesn’t have to pay anything upfront and gets their product immediately without paying interest, what’s the catch? 

It’s the online stores themselves who pay the price for this consumer-friendly financing alternative. Buy Now Pay Later firms charge retailers significantly more than card issuers, explains journalist Tom Richardson. “A typical Visa processing fee in the US is 3 per cent,” he says. “Sezzle charges retailers fees around 6 per cent plus 30 cents per transaction, with the pitch that this includes the 3 per cent card fee.” 

That said, Buy Now Pay Later rates can be as low as 3.75%. The exact rates that firms charge retailers depend on several factors, writes Callie Patteson at Today. The types of products sold, the length of time the store has been in business and exactly what item is purchased are all used to calculate the fee. While the fee is high, at least stores receive payment in full upfront from the payment platform. 

There is one Buy Now Pay Later offering that bucks the trend for high fees, says TechCrunch’s Sarah Perez. PayPal bundles its Pay in 4 installment option with its existing pricing, meaning stores don’t have to pay more to offer consumers the chance to delay payment. 

What’s the Benefit to DTCs?

For such a high fee, you’d expect some serious benefits. There are several excellent reasons why so many brands are already offering this payment solution. 

For one, stores tend to generate a lot more revenue. Shopping carts get bigger and are abandoned less often when the payment model is offered, according to the team at PayBright. When consumers can spread the payment of large purchases out over several weeks, they are less likely to suffer from sticker shock and more likely to make big purchases they otherwise wouldn’t have been able to afford. Some companies have reported more than 30% increases in average order value as a result of Buy Now Pay Later solutions.

But not all Buy Now Pay Later models are the same. Some leave default liability with the merchant, and some accept default liability themselves. Businesses with the latter model will have lower limits on the transactions they approve.

Stores with a Buy Now Pay Later option tend to convert more shoppers, too, writes Julia Matyunina at Mobindustry. That’s because consumers are more willing to make a purchase when they can have the product immediately instead of having to wait with layaway plans. This is especially true in retail segments like fashion, where consumers look for the latest styles.

Buy Now Pay Later programs can even attract new customers. Increased referral traffic is another benefit of the payment model, says President and Founder of The GM Agency Amelia Castellanos. Because firms like Afterpay advertise partner brands in their directory, stores can attract shoppers who might not have otherwise shopped their brand. 

Increased sales are important, but the payment model also offers a way for stores to increase brand loyalty, says Brad Paterson, CEO of global payments company Splitit. The more a brand is seen to encourage responsible purchases, the more a consumer is likely to trust that brand in the future. 

“Retailers won’t get very far in today’s market trying to upsell customers who can’t afford their products,” he writes. “Installment payment options allow retailers and customers to align across their financial values like adhering to a budget, avoiding debt, and increasing their purchasing power.”

A fashionable woman hold many shopping bags; Buy Now Pay Later concept

All That Glitters Isn’t Gold

While Buy Now Pay Later offers plenty of benefits to stores and consumers alike, there is a darker and somewhat murky side to the industry. 

First, there’s the issue of affordability. Just like with credit cards, the pay later offers are only affordable if consumers make payments on time, says Fortune’s Rachel King. “If they don’t make payments on time, again, just like with credit cards, those penalties rack up fast, and consumers face the potential of falling into a great amount of debt in a short amount of time.”

That’s why BNPL agreements can be so risky, says Ira Rheingold, Executive Director of the National Association of Consumer Advocates. “You’re creating incentive for people to buy things that they can’t afford.”

Secondly, they are unlikely to help consumers financially in the long run. Unlike credit cards, most Buy Now Pay Later programs don’t help consumers build credit, says Ted Rossman, Industry Analyst at CreditCards.com and Bankrate.com. Affirm does report to Experian, but Afterpay and Klarna don’t. They will resort to collection agencies, too, he adds, and bar you from future repayment plans if you fail to make payments on time. 

There’s also a regulatory problem. Many BNPL firms can sidestep financial regulations. Afterpay, for instance, “skirts the definition of a loan under some U.S. laws so it isn’t subject to the same regulation,” says The Wall Street Journal’s Stuart Condie. That doesn’t mean these companies are completely free from the law. “The state of California reached a settlement with Afterpay in April, however, over what it said were illegal practices, requiring the company to refund $900,000 to consumers,” he reports. 

It does mean these companies can get away with a lot more than credit card companies, though, says Go Fund Yourself Founder Alice Tapper. There aren’t regulations on how they can market themselves and they don’t have to include key information in ads or at checkout. “This means that some consumers, particularly those who might be younger or more vulnerable, are getting themselves into financial difficulty.”

What’s the Future of Buy Now Pay Later?

Despite those clouds, the future of Buy Now Pay Later looks very bright. A report from IBIS World predicts the industry will grow at 9.8% annually over the next five years, eventually exceeding $1 billion. 

There’s certainly plenty of room to grow. Some industry professionals, like Simpl Co-Founder and CEO Nityanand Sharma, say eCommerce will soon move away from credit cards to pay later schemes. “When you think about a more connected consumer class, a consumer class who’s expecting a high degree of transparency and great user experience, it just doesn’t work, which is where the opportunity for Pay Later is coming out,” he explains. 

Buy Now Pay Later firms are experimenting with consumer-focused platforms and tools, writes Gulnaz Khusainova, CEO and Founder of Easysize. Klarna has launched an app that allows consumers to make purchases on any product with a virtual Klarna card, and the company launched an in-store product at H&M in early 2020. Afterpay, too, is launching an in-store product and delivering personalized recommendations based on a consumer’s activity. 

The BNPL startups may not have the run of the market for much longer, however, writes Shannen Balogh at Business Insider. Established payment providers like PayPal are already offering their own Buy Now Pay Later service. Other competitors like Citibank and American Express are also launching post-transaction financing options at much more affordable fees. 

Nevertheless, it’s startups like Klarna and Afterpay that are popular with consumers right now and these should be the first pay later solutions DTC stores consider. It’s important to weigh your options carefully, though, says Jake Rheude, Vice President of Marketing at Red Stag Fulfillment. Every platform charges different fees, has different user experiences and pays providers at different times. Take time to find the solution that works best for you.

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