The holiday season will look a little different this year due to supply chain delays and retailers have sent a clear message to their customers: shop early.
Most weren’t prepared to make holiday-related purchases as early as September or October, but buy now, pay later (BNPL) services may be the best solution for many retailers and their customers.
Buy now, pay later services are easy for retailers to manage, they lead to greater customer loyalty, and they increase conversion rates across the board. In fact, RBC Capital Markets found that brands that offer a BNPL service increase conversion rates 20% to 30% and lift ticket sizes between 30% and 50%.
Furthermore, BNPL services aren’t just becoming popular because of supply chain delays. The pandemic has led to an e-commerce boom unlike anything we’ve ever seen before and that means new opportunities for online retailers. A survey conducted by the Strawhecker Group found an estimated 39% of consumers have already tried BNPL services at least once, and interest will continue to grow next year.
What are BNPL services?
Buy now, pay later services are short-term loans given out to customers by either online or brick-and-mortar retailers. Payments for these loans can be split up into recurring payments over the course of months or years and vary from interest-free to a greater percentage determined by the retailer.
This system is similar to layaway, but rather than waiting for the goods until they’re fully paid for, customers can receive them right away. In years past, customers may have turned to a layaway service in order to lock-down holiday gift purchases early in the season, but retail giants like Walmart have done away with or scaled back these programs.
Incremental payments are the new norm
“It’s all about incrementality… getting that incremental sale or incremental consumer,” argued Russel Isaacson, director of retail and automotive lending at Ally Lending. Incremental sales also mean higher average purchase sizes and frequencies of purchases—two factors that build trust between a brand and its customers.
For customers, BNPL services lead to added convenience when it comes to purchasing options and managing budgets. Installment payments can feel like the right choice for consumers who either don’t have access to credit or who don’t want to use a credit card. Gen Z and millennial customers are oftentimes prioritized over other age groups by companies such as Best Buy, Nike, and Urban Outfitters, who want to make their products as accessible as possible.
Ally Lending President Hans Zandhuis noted that BNPL options are very appealing for shoppers who don’t have the funds to cover a total purchase but may over the course of a few paychecks.
He relayed that the average transaction for a BNPL service is roughly $200, but that it would be a lot closer to $100 if the service was not available. With a buy now, pay later option, customers can spend $200 with 4 monthly payments of $50 that align with the timing of paychecks.
Sales are on-the-rise with BNPL services
Rue21 is a perfect example of how BNPL services come to fruition. The retailer’s key demographic is the 18-25-year-old female shopper—many of whom don’t use credit cards. When brick-and-mortar locations were forced to close during the pandemic, rue21 had to figure out how to sell to their online shoppers who didn’t have credit.
The retailer introduced Klarna, a Swedish fintech heavyweight, as a payment option for both in-store and online shoppers. As of this summer, Klarna purchases made up a quarter of rue21’s e-commerce sales, their order volume was 73% greater than other payment methods, and they saw a 6% uptick in purchase frequency.
Peloton also found success using BNPL services—particularly due to their expensive workout equipment and services. In 2019, the company paired with Affirm and received BNPL options for purchases up to $17,500.
Affirm boasts that their clients report an 85% uptick in average order value when customers use a BNPL option instead of another payment method, and that’s certainly true for Peloton. An estimated 30% of Affirm’s first-quarter revenue came from Peloton sales in 2021 and it’s hard to imagine those numbers dipping later into the year.
BNPL will extend beyond online retailers
Philip Belamant, CEO and founder of Zilch, argues that online shopping won’t slow just because brick-and-mortar locations start to reopen. He explains, “Fundamentally, consumers are driven by convenience, and will choose to shop and pay in ways that are easiest for them.
While we saw Gen-Z and millennial customers, in particular, shop online even before the pandemic, e-commerce has become part of the everyday lives of consumers across generational divides.”
At Zilch, Belamant launched “Tap & Pay-over-time” BNPL options for in-store customers who wish to spread their purchase payments over six weeks. Further, many argue that BNPL services will become part of the omnichannel experience for brick-and-mortar retailers if they haven’t already.
Loan companies like Klarna and Affirm are easier to integrate into physical storefronts than ever before and we’re already seeing it happening across retailers.
BNPL services are good for retailers and consumers
First and foremost, BNPL services have been met with one key piece of criticism: that they encourage consumers to spend outside their means. Judy Vee, a human behavioral expert, refers to BNPL services as “new age credit cards” that limit one’s ability to be financially empowered and resilient against uncertainties.
However, most of the industry agrees that there are some clear advantages to offering consumers an option unlike traditional credit cards.
Klarna’s Alex Marsh argues that BNPL is a more sustainable way for consumers to use credit. “[It] enables consumers to spread the cost of a purchase with no interest and in the case of Klarna, no fees. This means that consumers only ever owe the original cost of the product.”
Belamant, the CEO of Zilch, added that credit card businesses rely on customers failing to make payments on time so that interest and fees pile up. BNPL providers like Zilch maintain one key difference with credit card companies: they only make a profit if their customers pay on time, every time.
BNPL growth is unprecedented
No doubt, BNPL is the fastest-growing e-commerce payment solution. Coming in just ahead of digital wallets, the BNPL market represented $60 billion, or 2.6% of global e-commerce sales, excluding China. By 2023, BNPL could equate to 5% of the global e-commerce market if its growth rate continues on its current trajectory.
Of those affected, Gen Z and millennials have the most to gain from this kind of growth. Belmont argues that younger generations are the driving force for financial technology and that they won’t stick to the status quo just because their parents did. This means young people will look for purchasing opportunities outside what credit card companies can offer, and BNPL lenders are here to fill in the gap.
Just as brands seek personalized shopping experiences, BNPL providers need to create personalized lending options for technology-oriented consumers. And these options are attracting new customers as well.
Jeff Gennette, CEO of Macy’s told investors “With Klarna, we continue to see higher spend per visit and increased acquisition of new younger customers, 45% are under 40. Our goal is to convert all of these new customers to Macy’s loyal customers, who return for future purchases.”
Many of us continue to associate incremental payment plans with credit card companies, but there is reason to believe alternative payment solutions will make headway. Going into this holiday season and next year, there’s no denying that BNPL services will become a fixture on the retail landscape.
