Buy-now-pay-later options catch on with online retailers and shoppers - Featured Image

Buy-now-pay-later options catch on with online retailers and shoppers

By Fortis |

The installment payment option is here to stay, but consumers want choices. Retailers are seeing increases in average order value, conversion rates and sales when they offer their customers’ preferred buy now, pay later system as a payment option at checkout.

Keyzar Jewelry offered PayPal’s Pay in 4 and Shopify’s Shop Pay Installments as buy-now-pay-later (BNPL) options as soon as it launched its ecommerce site in January 2021. It was a natural fit for the retailer with an average order value of $2,500, says Chief Marketing Officer George Pich. What surprised him was that customers were not happy with this selection. Through the retailer’s Contact Us web page, shoppers voiced what they wanted: Klarna.

In May 2021, Keyzar Jewelry launched Klarna as a buy-now-pay-later option. Within 30 days, Pich says customers that paid using Klarna were spending more than those who paid in other ways. Conversion rates increased about 6% in the first month and another 5% the next month.

“Our conversion went up by a total of 11% in those first two months,” Pich says. Overall web sales increased about 14%, he says.

Sales increases like that explain why so many online retailers are quickly adding pay-later options. 45.7% of Digital Commerce 360’s Top 1000 online retailers — North America’s leading retailers by web sales — offered a BNPL option in 2021, up from 28.2% in 2020. And 7.4% offered two or more BNPL options, an increase from only 1% in 2020.

Small- to mid-sized retailers are also offering BNPL, with 32.9% of Digital Commerce 360’s Next 1000 offering at least one BNPL option. The Next 1000 lists retailers ranked Nos. 1,001 to 2,000 by online sales.

And shoppers are using these deferred-payment options. BNPL accounted for 2.9% ($157 billion) of global ecommerce transaction value in 2021 and is projected to reach a 5.3% ($438 billion) share of global ecommerce transaction value by 2025, according to “The Global Payments Report,” published in March 2022 by Worldpay, a payment processing firm owned by FIS, a global payment technology company.

BNPL appeals to younger shoppers

Buy now, pay later has proven especially important during the pandemic to a valuable demographic for online retailers: younger shoppers who may lack the means to pay immediately for larger purchases, says Jed Danbury, vice president at global payment service provider Computop.

“While already popular overseas, BNPL received a boost in the U.S. during COVID-19, as it provided cash-strapped consumers the ability to make partial payments upfront and then over a short time span,” Danbury says.

More than half of younger shoppers are using BNPL, according to financial advisory firm’s Aite-Novarica Group survey of 2,046 consumers, conducted between July 2020 and June 2021 and published in July 2021. Among Gen Zers surveyed (individuals born between 1996 and 2002), 58% made a purchase using BNPL. That compares with 56% of young millennials (born between 1990 and 1995), and 53% of older millennials (born between 1981 and 1983). That’s a stark difference compared with 22% of younger baby boomers (born between 1955 and 1964), and 19% of older baby boomers (born before 1955) that used BNPL.

BNPL is relatively new in the U.S. and, for the most part, consumers and e-retailers are happy with it. However, if many consumers start incurring fees when they miss payments — an increasingly likely scenario as interest rates rise — the costs could make the option less appealing. But it may still seem a better option than the interest charged on traditional credit cards.

BNPL providers approach fees differently. For example, Affirm offers an interest-free option if a customer can pay in four installment payments, but also offers customers interest rates on the principal balance of the loan. Other BNPL companies may be interest-free but charge high missed- or late-payment penalties.

“Each user should read the terms and understand them before rushing through checkout,” Danbury says.

Be mindful of defaults and rising interest rates

Defaults, coupled with rising interest rates and inflation, may also cause providers to pull back, says Greg Cohen, CEO of financial services company Fortis. It’s something to watch out for in 2022 and beyond.

“As rates go up, that forces providers to consider battening down the hatches a bit,” Cohen says. “Maybe they become more selective and someone who would have been approved for a $1,000 purchase is now only approved for $500.”

For now, it appears retailers need to offer BNPL or risk losing business. It particularly makes sense to break up payments for expensive items like Keyzar’s engagement rings.

Another online retailer, fluidfreeride, which sells electric scooters, didn’t offer buy now, pay later at first but succumbed to customer demand. As a result, AOV nearly doubled.

But what is just as interesting is that the price need not reach thousands of dollars to entice customers to complete checkout with BNPL. Monoprice Inc. customers are using it to purchase $200 headphones just as they might for a $4,000 sound system. And blender retailer BlendJet’s most popular item retails for $50 — but that hasn’t stopped 15% of customers using Afterpay at checkout.

Customers are using BNPL for products at many price points — but buy now, pay later services are not all the same. It behooves consumers to carefully weigh whether they can afford to pay on time or risk costly penalty fees and/or a negative impact on their credit report.

The concept of deferred payment isn’t new. Before ecommerce, many stores offered the “layaway” option, taking a down payment and then putting the item aside until it was paid in full.

BNPL systems are deferred payment plans that allow shoppers to split up payments into installments. This is a type of short-term loan that typically does not charge interest unless the customer is late to pay. Customers who miss a payment deadline are charged penalty fees or interest. All three U.S. credit bureaus — Experian, Equifax and TransUnion — have plans to launch the capability to receive data from BNPL companies in 2022.

With the online version of buy now, pay later, shoppers pay a down payment, typically about 25% of the total balance, and receive the merchandise. The shopper is responsible for paying off the remaining balance in interest-free installments, usually broken down by 4-week periods. It can be spread out beyond that, depending on the provider.

Affirm is different from other buy now, pay later providers. It offers an option to pay in four interest-free payments every two weeks. But it also has monthly payment plans and charges interest on the principal amount. Affirm offers payments between 0 – 30% APR based on a customer’s credit history and can be paid in three, six or 12 months. There are no fees or compounding interest. And there are no penalty fees for paying the balance off early. Options depend on the purchase amount, up to $17,500, and a down payment may be required.

For a $1,000 purchase at 20% APR over six months, the total interest equals $59.14. By the end of the six-month loan period, the customer will have paid a total of $1,059.14. The same loan over 12 months would accumulate $111.51 in interest and by the end of the loan, the customer will have paid a total of $1,111.61.

Retailers receive full payment within hours after the purchase, minus the processing fee the retailer agreed to as part of the partnership, according to Affirm.

Other popular BNPL choices include Afterpay, Klarna, Sezzle, PayPal Pay in 4, and Shop Pay Installments. Of these, only Afterpay does not perform any kind of credit check. It uses an algorithm to approve customers. Afterpay does not state the exact reason for denial to the customer. A person can be rejected because there are insufficient funds available on the card the customer is using. Or the shopping cart value is too high (the customer may be approved after removing items and lowering the value); the customer is new to Afterpay and trying to make multiple purchases within the first six weeks; or the customer already has many loans with Afterpay.

Customers must be over 18 years old and be the authorized holder of an eligible debit or credit card to use Afterpay. Purchases must be over $35 and 25% of the total cost must be paid up front. Customers can pay in four installments every two weeks until the entire purchase is paid off. Should the customer miss a payment, the account is frozen and they are charged an $8 late fee, followed by an additional $8 late fee each week until the balance is paid in full. Afterpay can report negative activity to Equifax.

Other BNPL providers perform a “soft” credit check, a kind of background inquiry that does not affect a person’s credit score. However, the result can affect the dollar amount the BNPL system will lend the shopper.

Klarna allows shoppers to break up payments into four or more interest-free transactions up to $10,000. For example, a Keyzar Jewelry customer interested in purchasing a $4,500 diamond eternity band can pay off their balance in $125 monthly installments over 36 months. Customers for other retailers offering Klarna can also “pay-in-30,” trying products for 30 days and only being charged for what they keep. Customers who decide to pay later with financing can select a payment plan.

Online retailers that use the Shopify ecommerce platform can offer Shop Pay Installments, which gives shoppers the option of paying in full at checkout or splitting their purchase into four equal interest-free installments. Shopify Shop Pay Installments is available for those who want to make a purchase for as low as $50 with a limit of $3,000.

PayPal Pay in 4 will split the total price of an order into four equal installments, which are due every two weeks. The first payment is due at checkout. Customers can pay down purchases beginning at $30 and up to $1,500. Customers using PayPal are subject to its soft credit check, which determines whether that person is allowed to use PayPal Pay in 4. A person having a PayPal account does not guarantee access to its BNPL option.

The AOV effect

Retailers stand to gain a higher AOV at checkout from customers paying with BNPL as is the case with fluidfreeride, an electric scooter retailer that added it in 2020. Sales tripled in 2020 and grew another 50% in 2021.

AOV is $1,200, a price point where BNPL makes sense. But founder and CEO Julian Fernau did not want to offer customers BNPL — at least at first.

“I believed that if you couldn’t afford a scooter, you shouldn’t buy one,” he says. “I’m German, and we’re not such a credit- and consumption-driven society compared with the U.S. So, yes, I shied away initially [from BNPL] because I thought it was too aggressive to have people rack up debt to buy one of our scooters.”

Fernau quickly realized U.S. shoppers wanted a BNPL option.

“I spoke to customers and realized that not only were we losing out on sales, but we were also not delivering what our customers wanted,” Fernau says.

In the months after adding Affirm, Fernau says there was a 20% to 25% increase in overall orders on fluidfreeride’s website. But what stood out is that customers paying with Affirm had nearly double the AOV compared with other payment methods. Affirm’s overall AOV is nearly $2,400.

Customers pay with Affirm 20% of the time, compared with credit card at 60% and PayPal at 20%.

It makes sense for consumers to break down payments for more expensive items. But for consumer electronics retailer Monoprice Inc., customers in the market for $200 headphones are just as likely to use BNPL as customers purchasing $4,000 sound systems.

“It’s an interesting curve,” says Richard Tseng, vice president of marketing, ecommerce and technology. “Customers will use Affirm to buy one high-end item, but then we also see customers buying multiple items that end up costing as much as $4,000 to $5,000.”

Affirm also impacts the conversion rate, but only in certain categories, Tseng says. In audio and video, for example, the conversion rate increases 20% to 30% when a shopper pays with Affirm. Tseng declined to disclose the company’s overall conversion rate. The median conversion rate for Digital Commerce 360’s Top 1000 is 2.84%, according to Digital Commerce 360 estimates.

BNPL for any price point

BlendJet’s blenders retail for as low as $50, but the retailer’s surveys indicated customers wanted Afterpay. On average, between 2019 and March 2022, customers chose to pay for their purchases with their credit card 38% of the time. PayPal accounts for 23%, followed by international payments, which account for 17%. Afterpay accounts for 15% of customer payments, and Amazon Pay for 7%.

BlendJet performed a test in January 2022 where some customers were offered Afterpay as an option while a separate group were not. BlendJet did not disclose how many customers were tested. The results showed that, on average, 15% of BlendJet customers offered the Afterpay option used it at checkout, mirroring the overall 15% of customers that currently choose Afterpay at checkout. Conversion increased 15% for those checking out with Afterpay compared with those not given the option. BlendJet’s overall conversion rate is 4% and Afterpay users’ conversion rate was 4.6%.

“I think that 15% for Afterpay is an exceptional number that exceeded my expectations,” says co-founder and CEO Ryan Pamplin. “The impact to our conversion rate is proportional to the percentage of customers who use Afterpay. Which means that 15% of people probably would not have bought a BlendJet without that payment option.”

Afterpay’s AOV is also higher at $71.70, compared with the average credit card ticket of $66.21 and PayPal at $65.49, BlendJet says, based on data from January 2022 through the first week of March.

Buy now, pay later’s consumer adoption, and its ability to raise average ticket and conversion for retailers, suggests it is here to stay. U.S. online retailers need to consider how each provider is different and strategize how BNPL can open the door to new customers, says Francisco Alvarez, advisor at Aite-Novarica Group. And customers need to think carefully about the fine print before committing to a payment plan.

“Retailers must question how a buy now, pay later provider can target a completely different type of customer and enter completely new customer segments,” Alvarez says. “It’s not just about offering more payment options, but why those payment providers appeal to certain customers versus others. There’s a lot to learn.”

By Digital Commerce 360 |