Why Retailers Are Embracing Buy Now, Pay Later Finance Services


Supply chains are blocked and manufacturing is limited. For weeks, headlines have been sending a clear message to shoppers: This holiday season shop early.

In years past, early bird buyers may have turned to layaway plans to reserve holiday gifts and pay for purchases over time. But many retailers, including the nation’s largest, walmart — have eliminated or reduced these programs. One reason is that buyers have new tools to spread out payments.

A popular option for consumers is to buy now, pay later. Retailers are also big fans. Point-of-sale loans are easy for retailers to manage, and research shows that these options lead to larger baskets and greater customer loyalty. RBC Capital Markets estimates that a BNPL option increases retail conversion rates by 20% to 30% and increases average note size by 30% to 50%.

Add additional sales

“It’s all about incrementality,” said Russell Isaacson, director of retail and auto lending at Ally Lending, “getting that extra sale or that extra consumer.”

According to Hemal Nagarsheth, associate partner in Kearney’s financial services practice, installment payments provide consumers with options and convenience when it comes to managing budgets and purchases. He said the option also increases trust between retailers and consumers, leading to “incremental sales, higher average purchase sizes and higher purchase frequency.”

Buy now, pay later, offered by companies like To affirmbased in australia After-payment and Sweden’s Klarna, are particularly appealing to younger buyers, like coveted Gen Z and millennial consumers. each plan has differences – the number of payments on specific terms – the main similarity is the promise of a handful of equal payments spread over a relatively short period of time, with no hidden fees. Often the plans are irrelevant.

Installment payments are more popular among consumers who do not have access to credit or who, for various reasons, do not wish to purchase with a credit card. The option also makes a lot of sense for buyers who don’t have the funds to cover the full purchase, but will do so over the next few paychecks, according to Ally Lending President Hans Zandhuis.

The average transaction value is about $200 for buy now, pay later, Zandhuis said. Often, the payout value for the retailer would have been around $100 had the option to pay later not been available, he said. With it, this same consumer can spend $175 to $200, with 4 monthly payments of $50. Payments are supposed to align with payroll cycles.

Take clothing retailer Rue21, for example. Its main demographic is a female customer between the ages of 18 and 25, who often does not use a credit card. With many low-priced items on its website and declining mall traffic, increasing average order volume is a key priority.

When the pandemic closed stores, Rue21 had to find a way to sell to customers online without credit. Since Rue21 added Klarna as an in-store and online payment option, its average order volume is 73% higher than other payment methods, according to a case study published by Klarna. Rue21 shoppers who transact with Klarna achieve the highest sales per customer with a 6% higher purchase frequency. In May, Klarna purchases accounted for more than a quarter of rue21’s online sales.

A logo sign outside of a Rue21 retail store in Chambersburg, Pennsylvania on January 25, 2019.

Kristoffer Tripplaar | Sipa via AP Images

Affirm boasts that its merchant customers report an 85% increase in average order value when consumers choose to use its BNPL plan over other payment methods. Affirm approves installment payments for total purchases up to $17,500, which has proven to be very important for of the peloton expensive training equipment and services. FT Partners, an investment bank focused on the fintech space, estimated that 30% of Affirm’s revenue in the first quarter of 2021 came from sales on Peloton’s website.

Klarna’s merchant base reports a 45% increase in average order value when a buyer pays more than four payments. Buyers can also choose to pay in full in 30 days without interest, or for a larger purchase, obtain financing with monthly payments for 6 to 36 months with an annual percentage rate between 0% and 29.9%.

New customers

Attracting a customer that a retailer might not have otherwise influenced is another benefit of offering buy-it-now and pay-later options.

Earlier this year, Macy’s CEO Jeff Gennette told investors that his partnership with Klarna helps him attract new customers.

“We launched Klarna on the Macy’s website in October [2020] and we’ve since expanded it to Macy’s, Bloomingdale’s and Bluemercury, both online and in-store,” he said. “With Klarna, we continue to see higher spend per visit and increased the acquisition of new younger customers, 45% are under 40 years old. Our goal is to convert all of these new customers into loyal Macy’s customers who return for future purchases.”

About 93% of Afterpay’s gross merchandise value in the most recent financial year came from repeat users of the installment payment service, with the oldest consumer making an additional 30 transactions a year.

Higher conversion

Installment payments allow the retailer to “convert a [consumer’s] wish in a sale,” according to Chris Ventry, vice president of global consulting group SSA & Co. “This removes the payment ability barrier,” Ventry said. “For those who use debit cards, possibility of an extended interest-free payment schedule through BNPL is attractive enough to drive conversion, which is the primary goal of all digital commerce sites. »

A Similarweb analysis of the top 100 fashion and retail websites in the US compared 50 merchants that offer a buy it now, pay later at checkout option and 50 that don’t. On average, sites with a BNPL option saw a 6% conversion rate compared to 4% for those without.

Afterpay said it increases a retailer’s conversion rate and incremental sales by 20-30% more than other payment options.

The additional revenue and increased conversion makes the additional transaction cost the retailer pays fintech companies worthwhile as well. Zandhuis said that if the retailer pays an additional 2% transaction fee to the BNPL company compared to the transaction fee charged by a traditional credit card company, “the math speaks for itself. The additional revenue is above cost”.

Afterpay and Klarna charge merchants 3% to 5% transaction fees, Affirm declined to disclose its transaction fees.

The programs also have advantages over traditional layaway, which requires retailers to store purchased items on-site while customers make installment payments over time. Increasingly, retailers are using stores as mini-distribution centers to fulfill online orders. In this model, the store space is limited.

Growth opportunity

Buy now, pay later is the fastest growing e-commerce payment method in the world, followed by the growth of digital wallets, according to FIS Worldpay. In 2019, BNPL’s $60 billion market accounted for 2.6% of global e-commerce, excluding China.

Worldpay estimates that usage of the option could grow at a compound annual growth rate of 28% to reach $166 billion by 2023. At that rate, it would account for around 5% of global e-commerce outside of the China.

BNPL currently accounts for less than 2% of North American sales, according to FIS WorldPay.

Coresight senior analyst John Harmon recognizes the opportunity for retailers, but doesn’t see it as a panacea.

“I don’t see the BNPL as a magic bullet, despite its burgeoning acceptance, because it’s just another kind of credit,” Harmon said.


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