Buy Now, Pay Later for Retailers

Online retailers (especially in the SMB space) must consistently look for ways to stay ahead of competitors. There are over 12 million unique online ecommerce stores today and that number continues to grow. Platforms like Square Space and Shopify make it especially easy for any individual to create a new website and begin to build a brand. For retailers that want their stores to stand out, they need to be on the cutting edge of technology and trends. This may involve new marketing strategies, innovating products/services, and even new financing options. Buy Now Pay Later is a new way for consumers to interact with your brand for purchasing.Conceptually, these platforms aim to allow for an easy lending service by offering short term, small financial loans for specific purchases. Most follow the pattern of 4 easy payments and look to automatically draw on these installments over a specified time frame.As the Buy Now Pay Later (BNPL) industry grows at a rapid rate (85% since 2020), many ecommerce retailers are wondering how the trend will impact their business long term. If you want to evaluate if this new payment option for consumers is right for you, see below on:

1. What is BNPL
2. Trends in the Financing Industry
3. Potential Future of BNPL

What is Buy Now Pay Later?

(A brief History)BNPL is a (relatively) new method of payment for consumers with online retailers. 3^rd party platforms partner with retailers and CMS’ to offer short term financing to consumers. This is usually presented as 4 easy payments, with the first one being a down payment. Details vary by retailers, it is meant to be an easy alternative to credit card debt while still allowing for a consumer to have their goods/services today. BNPL can be used for a wide range: Graphic T-Shirt purchases for $20 to new mattresses for $1,200.Buy Now Pay Later is not a new concept for consumers. Layaway and installment plans have been around for almost 100 years, first rising to popularity in the 1930’s following the Great Depression. Many consumers were still recovering from financial crisis while new innovations & technology spurred greater interest. Stores began to offer installment plans for customers so they can sell goods and consumers are still able to get what they need.Popularity in installment plans fell harshly in the 80’s as credit cards became widely available to the public. Rather than having multiple plans with different retailers, a consumer could now put all debt into a single institution and manage their finances efficiently. Layaway usage would slowly dwindle down to be shortly revived in 2009 and 2012 when physical retailers tried to spur buying during economic declines. This was a short-lived effort as BNPL companies started to gain traction in the early 2010’s (Affirm founded in 2012, Sezzle in 2016).These new fintech companies would grow steadily but economic volatility would be the catalyst for an explosion in adoption. Similar to layaway, economic conditions and financial trends birthed a new opportunity for financing. The worldwide pandemic left buyers with less stable income streams and time at home to shop online.

Consumer Benefits

A bulk of Buy Now Pay later adoption sits with Gen-Z (20-25 yrs old) and Millennials (26-40 yrs old). Today, credit cards are the main financial vehicle for many small and large purchases. Though credit cards are far from outdated, there are opportunities for improvements. Why are so many young buyers turning to these solutions? Let’s breakdown the benefits for the consumers we try to sell to.Credit Card Alternative:

• Many young buyers have a negative sentiment towards large financial institutions as many watched their parents struggle during the ’08 financial crisis. This left an imprint on the banking industry that may only now be coming to fruition. On top of that, the internet makes negative data easily available so large stories like Wells Fargo opening fake accounts and Chase Bank being linked to a large drug bust are easy to find and can last. Distrust in the existing banking system leave consumers open to alternatives.

Low Interest:

• Most BNPL services charge little or no interest to take advantage of their payment options. This is an attractive option, especially with the average credit card APR hovering around 16%.

Simple Solution:

• Credit Cards are popular but are not the most straightforward solution. As a young buyer, trying to understand concepts like paying down principle, monthly vs yearly APR, and long, complicated contract can be difficult. Being well versed in credit card management can sometimes demand tons of studying and efforts. BNPL solutions are extremely easy. They are available in your cart checkout online and approval is typically 5 minutes at most. Payments are fixed and steady, so expectations around when you are absolved of the debt is easy to understand.

Low Barrier to Entry

• Credit cards are great if you already have great credit and an established financial history. If not, you may need to go through a rigorous application process of providing financial records and wait for approval and then, you can have a credit card shipped out to you. During this process, you of do have your credit checked as well. On top of that, many credit cards tote high interest rates and annual fees, all of which force the buyer to commit to the financial institution and make for a larger decision.
• Buy Now Pay later applications are typically skirt credit checks and can allow consumers to be approved while their items are in the cart. Quick, easy and little to no commitment means the process is streamlined

Now this sounds like a great solution for consumers, there are a ton of benefits thrown their way, but what does this mean for the retailer? To put it simply: options and ease. Online retailers have a single goal of getting more buyers. Many conversion solutions for ecommerce retailers look to “shorten the path to purchase”.  Your potential customers may be strapped for cash in the moment, and you don’t want to lose out on sales due to financial hesitation. Compared to credit cards or loans, BNPL services are easy to get into for potential buyers. The ecommerce space is increasingly competitive; any edge over the other retailers can make the difference between a lifelong customer and a missed opportunity. The relationship with retailers is different based on the service. Some ask for 10% of revenue, while some charge an upfront fee to host the solution on your storefront.

BNPL here to stay?

There are many of signals showing that BNPL is not just a growing industry, but one that is here to stay.

• Adoption in Young Users: Research shows us that most buying behavior is developed as young as 7 years old. This means that for financial institutions, their best opportunity for creating financial habits is when a consumer begins to have disposable income. As larger number of 16-24 year old consumers are purchasing goods online, which also happens to be the largest adopters of BNPL services. As Gen-Z grows older and have more money, they are more likely to lean into the BNPL alternative
• Existing Users looking to replace credit cards:
• This C+R Research survey on BNPL habits show us how existing users view this financing option and plans to implement further.

• 59% purchasing an item they otherwise could not afford
• 50% of users use BNPL at least every 3 months
• 67% use BNPL at least half the time when shopping online
• 56% of users prefer BNPL over credit cards
• 38% plan to replace credit cards with BNPL solutions
• This is a lot of data showing that not only is it an option for people today, but they plan to continue the option and possibly even replace credit cards in the future.
• Large Retail Adoption
• The past 2 years have seen many big box retailers implement BNPL into their own options.
• In 2019, Walmart officially partnered with Affirm to offer installment plans at physical locations and online
• In August 2021, Amazon and Affirm partnered with each other to allow purchases above $50 to be split into flexible payment options. Affirm was trending as the most dominant solution in the market in 2021 and the partnership with Amazon easily solidified that.
• Also in August 2021, Square announced plans to completely acquire AfterPay w/ a $29 billion dollar price tag.
• In October of 2021, Target rolled out BNPL options with both Sezzle and Affirm for purchases over $100.
• Large institutions buying into a trend does not guarantee success but billions in acquisitions and infrastructure is a trend that SMB online retailers cannot ignore.

What does the Future Hold?

There are many ways to speculate on the path for the Buy Now Pay Later industry. What we know today is that there is excitement here and there is no reason a retailer cannot take advantage of it.Want to learn more about ecommerce best practices and trends? Please reach out to our team below!