New sneakers, a MacBook, a new fancy guitar— you can pay for almost anything in installments these days. This isn’t a completely new way of paying, but modern payment Fintechs have put a spin to it with ‘Buy Now, Pay Later’ – a proposition that’s appealing to a younger generation of credit shy shoppers. Eager to win over the swarms of online shoppers who have increased during the pandemic, retailers have been offering ‘Buy Now, Pay Later’ services at checkout like – Klarna, Affirm, and Afterpay.
What is the hyped Buy Now Pay Later (BNPL) offering of Klarna, Affirm, and Afterpay?
Klarna, Affirm, and Afterpay – are booming upstarts riding on the momentum of the growing demand for installment payments. Unlike the layaway plans of the old days, the new age method of making installment payments, called Point of Sale (POS) Loans, a.k.a. ‘Buy Now, Pay Later’, is becoming an attractive proposition. POS loans are quite the opposite of layaway. With layaway, the price of an item is paid overtime and you receive the item once you’ve cleared your bill. POS loans change things up, by allowing you to take home the item you would like to purchase first, and then pay for it over a specified period of time.
This essentially lets shoppers break down their purchases into equal installments without interest or fees, making even the most ‘expensive buys’ seem affordable. Klarna, Affirm, and Afterpay are teaming up with merchants to help make their installments option available at checkout while charging a processing fee to the retailer – a strategy not too different from credit cards. So what’s the win here? Merchants get higher average purchase prices and shoppers are benefiting from these companies helping them fill in their financial gaps.
BNPL has been around for a while, what’s driving its popularity now?
A transition to digital payments has long been underway. But explosive growth in Buy Now, Pay Later as an alternative way to make payments has been triggered by two key trends of the public health and economic crisis – a spur of growth in online shopping and the growing distrust of credit cards, primarily among today’s young shoppers.
This slick way of digital lending is a big hit among Gen Z and Millenial shoppers who are tempted by the ease of payments and interest-free loans unlike the usual credit card options at their disposal.
“Buy now pay later products especially resonate with young consumers, who, since the start of the pandemic, have contributed to the significant shift in online spending.”Shopify’s COO, Harley Michael Finkelstein
With this sharp uptick in consumer adoption of BNPL, companies like Klarna, Afterpay, and Affirm, have growth trajectory projections shooting through the roof. In late December of 2020, a Bank of America survey predicted that Buy Now, Pay Later apps like Afterpay, Affirm, Klarna, and PayPal were poised to grow 10 to 15 times by 2025 and would eventually process between $650 billion and $1 trillion in transactions. This seems far from unreasonable when data showing Afterpay grew 200% or more year-over-year in 2020, with Klarna and Affirm seeing accelerating their growth as well. With transaction volumes exploding and unprecedented user growth, these companies will soon be ubiquitous in every household.
Consumer trends are changing, and so is the strategy of the big guys. There were a record 46 mentions of BNPL in February 2021, in earnings calls, conferences, and shareholder meetings, according to data compiled by Sentieo, up from zero in April. Alexander Lacik, CEO of jewelry seller Pandora, said at the beginning of 2021, that their company was experimenting with BNPL offering to help convert more online visitors into paying customers. VCs are also taking a keen interest in the sector as evident from the BNPL startup funding growing at a strikingly steep pace of 93% CAGR from 2016 – 2020.
How is Buy Now, Pay Later changing retail?
This attractive payment option is shaking up the retail industry. The unanticipated boom has surely been a bolt from the blue, but quite a positive one for natively online retailers or those who had to pull down their shutters and switch to e-commerce in lieu of the global pandemic.
One way Retailers are benefiting is through higher conversions. On average two-thirds of shopping carts are abandoned resulting in tonnes of lost sales and profit. BNPL is changing this by flipping the outcome and encouraging purchases. As a result, there has been a sharp decline in cart abandonment rates, without any significant cost increases.
Retailers are also seeing that by offering BNPL options, loyal customers are increasing their frequency and value of purchases which pans out well for customer lifetime value as well.
Overall, the customer experience is becoming more positive. With more ways to shop, more ways to pay, and more products to choose from – things seem to be looking really good from a customer’s perspective as well. Maybe not entirely.
BNPL is a double-edged sword. The fact hidden in the fine print is that people are spending much more than they usually would. The Strawhecker Group’s research confirmed that Buy Now, Pay Later use tends to make people splurge, with 39% stating that they spent much more than they usually would. The propensity of consumers to spend beyond their means with ‘one click’ has become a lightning rod for regulatory oversight. The thing with this kind of debt offering is that you’ve got to pay it back. But with loads of young people opting in for this kind of installment payments who are not always aware of the risks surrounding it and how to manage it well, makes us ask ourselves – is it time to rein back the frenzy with adequate regulatory pressure?