Supply chains are harassed and manufacturing is limited. For weeks, the headlines have telegraphed a clear message to shoppers: This holiday season, shop early.
In years past, hasty shoppers 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 removed or cut back those programs. One of the reasons is that buyers have new tools to spread payments.
A popular option for consumers is to buy now, pay later. Retailers are also big fans. Point-of-sale loans are easy to manage for retailers, and research shows these options lead to larger carts and greater customer loyalty. RBC Capital Markets estimates that a BNPL option increases retail conversion rates by 20-30% and increases average note size by 30-50%.
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“It’s all about incrementality,” said Russell Isaacson, director of retail and auto loans at Ally Lending, “getting that incremental sale or that incremental consumer.”
Installment payments provide consumers with options and convenience when it comes to managing budgets and purchasing, according to Hemal Nagarsheth, associate partner in Kearney’s financial services practice. He said the option also increases trust between retailers and consumers, resulting in “additional sales, higher average purchase sizes and higher purchase frequency.”
The Buy Now, Pay Later payment plans offered by companies like Affirm, Afterpay, based in Australia, and Klarna in Sweden, are especially appealing to young buyers, like Gen Z and coveted Millennial consumers. While each plan has differences – in the number of payments to 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, 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 in future paychecks, according to Ally Lending chairman Hans Zandhuis.
The average value of a transaction is around $ 200 for a buy it now and a subsequent purchase, Zandhuis said. Often the payout value to the retailer would have been around $ 100 if the option to pay later hadn’t been available, he said. With it, this same consumer can spend from $ 175 to $ 200, with 4 monthly payments of $ 50. Payments are meant to align with payroll cycles.
Take the clothing retailer Rue21, for example. Its key demographic is an 18 to 25-year-old female consumer, who often does not use credit cards. With many low-priced items on its website and dropping mall traffic, increasing average order volume is a key priority.
When the pandemic closed stores, Rue21 had to find a way to sell to its online shoppers 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 buyers who transact with Klarna achieve the highest sales per customer with a 6% higher purchase frequency. In May, Klarna’s purchases represented more than a quarter of online street sales21.
A logo sign outside of a rue21 retail store in Chambersburg, Pennsylvania, on January 25, 2019.
Kristoffer Tripplaar | Sipa via TUSEN 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 progress payments for total purchases of up to $ 17,500, which has proven to be very important for Peloton’s 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 with no interest, or for a larger purchase, get financing with monthly payments of 6 to 36 months with an annual percentage rate between 0% and 29.9%.
Attracting a customer that a retailer might not otherwise have influenced is another benefit of offering buy now, pay later options.
Earlier this year, Macy’s CEO Jeff Gennette told investors that his partnership with Klarna is helping him attract new clients.
“We launched Klarna on the Macy’s website in October  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 l 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 come back for future purchases. “
Approximately 93% of Afterpay’s gross merchandise value in the most recent fiscal year came from regular users of the installment payment service, with the oldest consumer making an additional 30 transactions per year.
Installment payments allow the retailer to ‘convert a [consumer’s] wish in a sale, “according to Chris Ventry, vice president of the company’s global consulting group SS&A.” This removes the blockage in the ability to pay, “Ventry said.” For those who use debit cards, the potential of an extended interest-free payment schedule via BNPL is enticing, ultimately enticing enough to drive conversions, which is the primary goal of all digital commerce sites. “
A Similarweb analysis of the Top 100 US Fashion and Retail Sites compared 50 merchants who offer the Buy It Now, Pay Later option at checkout and 50 who don’t. On average, sites with a BNPL option experienced a conversion rate of 6% versus 4% for those without.
Afterpay said it increases a retailer’s conversion rate and additional sales by 20-30% more than other payment options.
The extra revenue and increased conversion make the extra transaction cost the retailer pays to fintech companies worth it as well. Zandhuis said if the retailer pays BNPL an additional 2% transaction fee over the transaction fee charged by a traditional credit card company, “the calculations speak for themselves. The additional income is greater than cost “.
Afterpay and Klarna charge merchants a 3% to 5% transaction fee, Affirm declined to disclose its transaction fees.
The programs also have advantages over traditional layaways, which require retailers to store purchased items on-site while customers make installment payments over time. More and more retailers are using stores as mini-distribution centers to process online orders. In this model, storage space is essential.
Buy Now, Pay Later is the world’s fastest growing e-commerce payment method, followed by the growth of digital wallets, according to FIS Worldpay. In 2019, the $ 60 billion BNPL market represented 2.6% of global e-commerce, excluding China.
Worldpay estimates that the use 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 market. China.
BNPL currently accounts for less than 2% of sales in North America, 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 BNPL as a magic bullet, despite its booming acceptance, because it’s just another kind of credit,” Harmon said.