How is Buy Now Pay Later (BNPL) Transforming the E-commerce Industry?

Among the plethora of payment options now available, a new player is now vying for your customer’s attention. It lets your customer make a purchase right now, while delaying the payment for it until much later. Unlike credit cards or other monthly installment options, this payment option is easier to use and does not require customers to provide too much information in order to avail this service. The Buy Now Pay Later payment method, as it is called, is causing ripples in the ecommerce industry and is fast gaining popularity among customers, especially young millennials.

What is BNPL?

With Buy Now Pay Later, customers can purchase a product right now but spread their payment over weeks or months, sometimes absolutely interest-free. While it is quite similar to the options provided by credit cards and the layaway option of yore, this option is more customer friendly as it allows them to avail this option without going through tedious backgrounds checks. This payment is also gaining favor with merchants as it allows them to provide better customer experience, move their inventory faster, and helps their customers stay longer with them among various other benefits.

How Does It Work?

On the customer’s end, the model is quite simple. During checkout on ecommerce sites, customers are given the option to place the order right away and are usually given options to fulfill the payment – either to pay it in full after a stipulated amount of time or pay in periodic installments.

While some merchants offer their own BNPL options, various third-party providers like Klarna, Affirm and QuadPay offer these options in a hassle-free manner. Even big players like PayPal and traditional banks like Citi and Chase are beginning to catch up to the trend with offerings of their own. Many merchants prefer using such a third party as it allows them to receive the payment right away and at the same time, put the onus of repayment on these vendors rather than having to do it themselves. Merchants who use such third party providers usually pay a 2-6% commission on every transaction.

Although this model does not require elaborate background checks on the customer and does not require the customer to jump through hoops in order to avail this service, most BNPL providers do conduct a soft credit check. This ensures that they avoid providing this service to people who are almost certain to miss their repayment obligations. While some providers do not charge an interest rate at all, some charge flexible or varying interest rates and some others offer a consistent interest rate across products.

3 Ways BNPL Can Drive Sales

Acquire New Customers

Providing a Buy Now Pay Later option could increase the chances of a customer making a purchase. For instance, in a study by BigCommerce, 31% respondents said they never would have made a purchase had there been no BNPL option.

As this payment model gains traction, especially among the younger demographic known as the millennials, providing this option will increase customer base and could potentially lead to an increase in sales. In a survey of 2000 Americans conducted by The Ascent in July 2020, BNPL usage growth was largest in the 18 to 24 (62% growth) and 55+ (98% growth) age groups between July 2020 and March 2021. Among other customer segments, this model was found to be particularly popular with customers who usually wait for their paychecks in order to make a purchase as this gives them the option of obtaining the product while being able to pay once they have the means to.

More and more consumers are now choosing this payment option. In The Ascent survey, 55.8% of consumers have used a buy now, pay later service, up from 37.65% in July of 2020 -- an increase of almost 50% in less than one year, while 53% of respondents who have never used BNPL say they're at least somewhat likely to use it within the next year. Even customers who have the means to pay immediately have been found to use this option to make a purchase as they see little downside to it and buy products they otherwise would not have bought if this option was not made available to them.

As it gains popularity, many customers might actively seek and move towards merchants who provide this payment option, because of which many third-party providers list merchants who provide this option.

Increase Customer Lifetime Value

Providing an easier payment option can ensure that customers keep returning to a particular site for their purchases, thereby increasing the time a customer is sticky to that site. While providing such flexibility increases the duration that a customer stays with a merchant, it could also increase the ticket size of the purchases they make. Especially in cases where the products are higher prices, a customer might be more willing to convert and make a purchase when they know they have the option of spreading out their payments into manageable installments. In addition, when customers know that a particular merchant offers a BNPL option, chances are they will return to the same merchant for their next big-ticket purchase, thus feeding into the loop and increase the average customer lifetime value.

Reduce Cart Abandonment

According to a survey by the Baymard institute, ecommerce sites face an average cart abandonment rate of 69.8%. While 7% of the respondents said they did not complete the purchase because of a lack of payment options, 17% said they did not trust the site with their credit card information. It is possible that these card abandons could have been saved had there been a Buy Now Pay Later option. Apart from these benefits, providing a BNPL option could potentially help build trust by encouraging more customers to try products without inhibitions and also improve customer experience.

What Does BNPL Require?

Risk Management – Merchants looking to offer BNPL options of their own need to be adept at risk management and have strong finance management as BNPL is a credit product at the end of the day. While merchants may be able to avoid paying commission fees to third party providers this way, it increases the chances of lost revenue and puts the burden of revenue collection on the merchants.

Technology – Whether merchants choose to go it on their own or choose a third party BNPL provider, from the customer’s perspective, the most attractive feature of the BNPL model is the ease of use. The fact that one click is all it takes for customers to buy what they want, while not having to worry about the payment right now is alluring to customers. In order to deliver this seamless customer experience, there needs to be a sound technological system in place.

How Can Merchants Add a BNPL Option to Their Site?

If merchants do not wish to use their own BNPL financing, there are various third-party vendors who can help integrate this option to any ecommerce store. Vendors like Klarna, PayPal Credit, Affirm and Afterpay all provide different, flexible options and also allow for integration with almost any ecommerce platform like Magento, BigCommerce, Shopify, Drupal Commerce among others.

Buy Now Pay Later is transforming the e-commerce industry and is here to stay. Find out how you can include this option to your e-commerce store by contacting Ameex Technologies.