The notion of "Buy Now, Pay Later" (BNPL) isn't new. Most large purchases people make, from houses to cars to college degrees, are transactions paid off for a set period of time post acquisition.
Traditional credit cards and store-specific credit lines are also common examples of the shop now, pay later payment methods. But there's a new version of consumer payment experience developing in the ecommerce world and it's changing the way people shop, spend, and manage their personal finances.
In this article, we'll discuss how Buy Now, Pay Later works and examine the reasons why having a BNPL solution is ROI-positive for ecommerce brands. We'll also consider why Millennials and Gen Z are so important to the future of ecommerce in general and BNPL in particular and touch on some of the challenges brands are concerned with when it comes to implementing BNPL.
A quick note: The Buy Now, Pay Later concept in ecommerce is also referred to as Shop Now, Pay Later. We'll use "Buy Now, Pay Later" or BNPL for the purposes of this article.
Buy Now, Pay Later in the Ecommerce Space
Typically, Buy Now, Pay Later tends to be implemented in four different ways:
1. Pay in full within 30 days with no interest: This is the most straightforward option.
2. Pay in the short term with multiple installments, with no interest and no price difference: This usually takes the form of three or four installment payments, usually two weeks or one month apart.
3. Pay in the short term with multiple installments, with no interest but with a price difference: For example, a customer could be offered the option to pay in one payment of $97, or in three monthly payments of $37 each. The latter totals to $111, meaning that the customer is paying an additional flat fee ($14) for the option to spread out their purchase, passing some or all of the vendor's additional overhead to the consumer.
4. Pay in the intermediate term, with multiple installments, with no price difference but with interest accruing: The specific details can vary significantly from retailer to retailer, but generally speaking, the time frame is three years or less.
In other words, there are more choices for consumers looking to delay payment on their purchases online. More importantly, consumers want those choices. In fact, one study (citing multiple sources) found that a majority of respondents want to have a "variety of payment options."
Why Buy Now, Pay Later Is Good for Ecommerce Brands
The majority of consumers want the BNPL kind of purchasing flexibility. Consider Millennials and Gen Z– who are spending $600 billion per year and climbing – made 60% of their purchases online, up from 47% just two years earlier. That group is projected to account for 35% of all daily per-person consumer spending by 2030. What’s more, two-thirds of them don't own a traditional credit card and don't want to.
The generation of consumers that will be the engine of ecommerce for decades to come is looking for a new way to pay over time. But if it's not credit cards, then how will retailers get paid? As it turns out, major BNPL providers such as PayPal, Klarna, Bread, and Affirm all pay retailers the full amount of a consumer's purchase and take on the process – and the risk – of collecting payments over time from the consumer.
With the risk of default and fraud removed, the next thing to consider is the other side of the transaction: the revenue. Guidance’s partner, Klarna, provides BNPL solutions to over 200,000 retailers serving more than 85 million customers. Klarna reports the following staggering increases:
- An uptick in average order value (AOV) by as much as 45%, depending on the BNPL option chosen.
- A 35% increase in checkout conversions (with cart abandonment rates near 70%, this is significant)
- A significantly reduced average return rate of 5.4% (the industry average is 20%).
Other statistics that are just one step removed from the bottom line also support the move toward providing BNPL options. Klarna recently completed a survey of 2,000 US consumers and 250 retail decision-makers. According to their research, 36% of consumers say flexible payment options would encourage them to shop again with a brand and 27% said flexible payment options would make them more likely to spend more with a brand.
The ecommerce checkout process itself can be improved with the implementation of a BNPL system. Klarna's study found that 28% of respondents said a long and cumbersome checkout process is the top driver of disloyalty for a brand. On the flip side, 18% of their respondents said they would be more likely to leave a positive review for a brand if the checkout process was smooth and offered them the payment options they wanted.
Challenges to Implementing a Buy Now, Pay Later Solution
A BNPL solution is an investment and every investment needs to be weighed against the revenue that will be gained from it. Once the solution is up and running, our partners at BigCommerce report that the commission paid to a BNPL provider is between 2%-6% of each transaction, plus a fixed fee.
At first blush, that can seem a bit steep but when weighed against the combination of higher AOV and higher checkout conversions – not to mention the appeal to a generation that's actively shunning credit cards – and the case becomes that much more compelling.
Klarna also notes that, for luxury brands, it might seem like the idea of offering a BNPL solution would contradict the brand's messaging and positioning with consumers. But for luxury brands looking to attract a younger (Millennial/Gen Z) audience, offering additional payment options, especially for a group in which the majority choose not to own a credit card, BNPL actually encourages them to buy where they otherwise would not have.
The Future of Buy Now, Pay Later
The Buy Now, Pay Later for your ecommerce business is not a one-size-fits-all solution. The best solutions will be adapted by the vertical and the audience, while addressing your company's financial situation, your perceived risks, and your growth opportunities. Use this contact form to get in touch with Guidance and learn how a BNPL solution can increase your average order value (AOV), checkout conversions, and customer lifetime value (LTV).