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Buy Now Pay Later (BNPL) financing solution is not new, and retailers already know for years such interest-free instalment plans. While basically being a loan, it is nowadays marketed as a convenient payment option and has steadily and quietly developed over the 2010’s. Covid-19 only accelerated its growth as both retailers and consumers found great interest in such a payment method.

According to Affirm fintech, BNPL is expected to triple over the next two years. Stating BNPL is rapidly growing is an understatement. According to

https://www.iads.org/files/pmedia/public/r6872_9_article_1_-_buy_now_pay_later_platforms_-_coherent_market_insights.pdf

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published in July 2020, the global market was valued at USD 7 320 million in 2019 and should reach USD 33 638 million by 2027. North America is currently the biggest market by volume and revenue and Asia Pacific is expected to be the fastest growing region in the future.

That said, what does BNPL have to offer? Should retailers bet on it and why? Should customers trust such a payment method? Is it a sustainable model or will it change in the future?

BNPL and retailers: a match made in heaven?

First, let’s see how it works from a financial point of view. Like most payment solutions, BNPL firms are paying full purchase amounts upfront while charging fees to retailers: they are usually coming as a flat fee along with a commission, both taken on each transaction. Depending on the countries and whether it’s Afterpay, Klarna or Affirm (some of the largest BNPL companies), fintechs charge retailers a flat fee of USD 0.3 to 1 (for processing the payment) and a commission of 3% to 6% depending on the purchase amount. These rates are higher than debit card (accounting for 0.5 to 1% per sale) or credit card ones representing up to 2% per transaction.

Retailers’ margins have been dramatically challenged over the past years. Discount periods and rates have only been rising, sometimes representing up to 10 months a year, especially in fashion, a crucial part of the business for most department stores, and for BNPL users. Acceleration in e-commerce has also been affecting margins with supply chain investments and customers’ expectations for free and fast deliveries. In this environment, BNPL solutions are efficient but they surely represent additional costs for retailers. Last, it’s worth knowing that, as Klarna states on its website, BNPL technology allows customers to set price alerts on saved items for them to “never pay full price again”. Not really a message merchants want to hear…

On the bright side now, numbers claimed by BNPL companies are like winning the lottery as the benefits in volume and recurring spending seem to be worth the high fees. Retailers, by offering a BNPL option, are creating a relationship with consumers that are keen to purchase. According to BNPL companies, shopping carts increase up to 30%, abandonment at checkout decreases up to 25%, repeat customers increase up to 20%, and return rate reduces. Affirm, Afterpay, and Klarna see average basket value rise 85%, 30%, and 45% respectively.

The magic in BNPL solutions also stands in their younger customer base. Afterpay claims that 73% of their shoppers are Millennials and Gen Z consumers. And merchants say that 30% or more of Afterpay customers are new to their brand. Macy’s (partnering with Klarna), said that 40% of shoppers using BNPL are new shoppers and 45% are under 40 years old. Only 25% of Macy’s existing customers are under 40.

Considering the challenges retailers are currently facing, proposing a BNPL payment option is worth it: sales volume will increase, customer base will grow and merchants might start long-term relationships with younger consumers they would not have been able to reach otherwise. Retailers will also benefit from additional and unprecedented visibility thanks to BNPL apps, designed to display brands and products in a seductive way. These new shopping apps are a complementary channel for retailers, and an important one as they are targeting younger generations.

Many younger customers are considering themselves as being part of a community. This is why word of mouth explains a fair part of the BNPL success, recommendations from friends or influencers working their magic. In 2020 in the U.S.,

https://www.iads.org/files/pmedia/public/r6873_9_article_2_-_buy_now_pay_later_services_growing_quickly_among_u.s._consumers_-_the_ascent.pdf

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shows 27% of BNPL users heard about it on social media and 18% through friends and family. In this environment, BNPL is appealing to younger generations facing difficulties in accessing credit cards or simply considering them old-school or untrustworthy.

Furthermore, BNPL is about data. Becoming shopping destinations, BNPL apps are connecting customers to merchants thanks to an algorithm personalising brands, products and deals for each user. Needless to say, fintechs are gathering a huge number of information on shoppers while remaining very silent about the ownership of such data. Because of that, it’s hard to believe that ownership would go to retailers. So the question is key when entering a deal with a fintech. But retailers might learn a lot about their new customers anyhow, as they are collecting all information about the purchase itself.

IADS members have already embarked on BNPL business. Interestingly, The SM Store in Philippines has developed a partnership with 13 banks, not with a BNPL fintech. Started in January 2021, the department store offers to pay any item in 3, 6 or 12 interest-free instalments, depending on the purchase amount. Though they are not called BNPL, IADS members are offering -and have been offering for a while- instalment plans through their credit cards.

Pay later, but pay up

Whether it’s through Netflix or Amazon Prime, we are all living a part of our lives through subscriptions. Watching a movie at home has become a seamless experience as well as its payment thanks to monthly instalments. As a result, consumers are more and more used to frictionless and contactless payments solutions and Covid-19 has accelerated this trend.

When it comes to customers, BNPL promise is double. First, convenience. As applying for a classic instalment through a retailer’s credit card requires much information and sometimes frictions and delay, the BNPL registration process is supposed to be seamless and fast. The approval, relying on the shopper’s debit card, is occurring in real time and not affecting applicant’s credit score (assuming they pay on time).

The payment part is easy: shoppers just have to confirm instalment terms (number of payments, amount of each one) and total cost of the purchase. Payments due in three or four instalments are interest-free, while the interest rate goes from 15% to 24% for payments from five to six instalments or more. If BNPL option is not offered by the retailer, fintechs can instantly create a virtual one-time card number to be added to Apple or Google wallets.

Convenience is also a factor in budget management. A Cornerstone survey shows that most BNPL millennial customers in the U.S. don’t really need to postpone payments as they earn more than USD 75 000 a year and hold credit cards, but rather prefer paying in instalments to help their budgeting.

Second part of the promise: providing essential financial service. Given the current economic environment, it’s true that flexible financial options have proved necessary to some people. To appeal to them, Affirm motto is reassuring: “Pay at your own pace. When you buy with Affirm, you always know exactly what you’ll owe and when you’ll be done paying. There are no hidden fees—not even late fees.” BNPL solutions usually cover payments from USD 50 to USD 17 500 so they are now also used to pay for small daily expenses, bills, or even tuition fees.

Trouble in paradise?

One of the main interests for merchants using BNPL solutions is to access to younger customers and engage in long-term relationship with them. But it might come at a risk. A BNPL study conducted by The Ascent shows that only about 1 in 5 of consumers who use BNPL apps actually understand how they work. To some immature customers, an item will seem more affordable than it is if its payment is split in multiple months. If they end up paying important additional fees, who will the shopper blame, the BNPL company or the retailer? One can guess that the retailer will be seen as guilty, putting the customer relationship at risk for the future.

Whether it’s splurging or just paying for commodities, these payment options are often stretching consumer financial capacities beyond their real means, leading some of them to fall into debt. And this is currently the major factor limiting an even bigger increase of BNPL, as complaints regarding the late fees are increasing. For instance, Afterpay charges USD 10 for each missed payment and USD 7 if the instalment remains unpaid after a week. Users missing all the instalments are charged a late fee of USD 68. Considering most of the payments made using BNPL are under USD 500, these fees are relatively high.

According to a survey conducted in the U.S. in November 2020 by Credit Karma, nearly 40% of consumers who used BNPL missed more than one payment. Nevertheless, Klarna, which has partnerships with over 250 000 retailers, said credit losses have fallen across all major markets. Afterpay, also said that late fees from consumers accounted for less than 9% of company’s income in the 2020 last quarter.

What’s next for BNPL?

While BNPL business surged with the pandemic, and given the nature of its customer base, the question of responsible lending policies arose in some countries. In the U.K. for instance, where the BNPL market represents USD 3.7 billion, consumer groups asked for regulation. As a result, the U.K. Treasury announced BNPL companies will have to conduct affordability checks before lending to customers.

More responsibility could come through certification. Sezzle, a BNPL company has recently been “B Corp” certified. This certification concerns for-profit companies that are taking into account the community they are engaging with. In the case of Sezzle, “B Corp” certification has acknowledged a commitment to financial education and a support to young adults in their purchase needs.

But still, is BNPL a sustainable business model? Fintechs could be considered as an additional middle-person between consumers and retailers, a position usually only occupied by banks. This is where an interesting battle might happen. As a direct competition to banks, Affirm launched a debit card, showing BNPL companies are willing to gain on the banking industry. On the other hand,

https://www.iads.org/files/pmedia/public/r6874_9_article_3_-_how_banks_can_use_customer_data_to_compete_in_the_buy_now_pay_later_space_-_forbes.pdf

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knowing they are ideally positioned to enter the market. They are able to tailor BNPL solutions through their own debit or credit cards, additionally taking advantage of all the data they own as well as their capacities in terms of security. In that case, banks could eventually eat BNPL firms alive.

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What about retailers? Even though BNPL might only be a fleeting trend led by younger generations, offering a BNPL payment option to customers is as profitable as it is necessary to gain additional shoppers and new sources of revenue. At least for the time being, even if BNPL solutions are a competition to retailers’ credit cards.

For tomorrow, the goal could be to transform these shoppers into store-branded card holders by evolving the credit card solutions to include BNPL options. The example of Macy’s is really of some interest. Besides offering Klarna’s BNPL options to customers, the department store has invested in the fintech, showing a first step and possible path to fully include BNPL in its offer.

Credits: IADS (Christine Montard)