The price of retail items has been climbing for some time now, and it’s likely something you’ve experienced recently. For instance, the average cost of food has risen nearly 10% compared to last year which has been a cause for concern among consumers but an opportunity for businesses. Convenience is a recurrent theme in the formation of technological trends whether it's the fastest delivery time, internet speed, or access to certain content. With every innovation and company emerging there is a battle to be more convenient than the next. This simple concept is a major driver in decision making and consumerism which has led to it consistently being the premise that services are based around in society.
The FinTech industry has fully embarked on a quest to provide customized convenience to consumers globally, utilizing all sorts of financial methodologies. The industry has a variety of services to offer and one of the most popular at the moment is buy now pay later (BNPL). The concept is rather self-explanatory and right off the bat may raise questions around the kind of revenue benefits there are for those using it. Someone buys something now, pays for it later, and the business benefits from this? Opposed to just receiving the full sum at the point of purchase?
You’ll be interested to know that retail purchasing using BNPL during 2020-2021 went from $24 billion to $100 billion. The main consumer bases responsible for this growth are the Millennial and Gen Z demographics who’ve had tremendous influence over FinTech markets. To put that in perspective, over 70% of millennials stated that they’d be more interested in financial services from tech companies (like Apple Pay, Google Pay, Venmo, PayPal, etc) opposed to traditional institutions. There is a level of trust that the public has in these companies who’ve engrained themselves in everyday consumption. By taking on the finance industry, they bring the majority of their already loyal consumer base with them.
Back peddling for a moment, we still haven’t answered the question of how businesses make money when using BNPL. It’s very simple; BNPL vendors are just the service providers who bridge the gap between curious browsers and paying customers. They receive their fee (typically between 2%-8%) when the sale happens. It is the institution providing the goods that pay them so that their consumers can access the BNPL service through their platform. Merchants using the service benefit as people are more likely to go forward with their purchase when they can have it before they fully buy it.
For example, if an item is $200, someone may be intimidated when asked to fill in their banking details and abandon their cart (we’ve all been there). Whereas when there is an option to make 4 payments of $50 over 6 weeks, that seems a lot more intriguing. This even leads consumers to shop in price ranges they may have never considered before. Experts estimate that the service is taking conversion rates up to 30% and ticket sizing to 50%.
So who are the organizations that merchants trust to provide this service? There is a wide variety of companies all with their approaches to this concept. Here are some to note:
These are just 5 of the players who’ve made a significant name for themselves and continue to search for ways to outperform each other. There are many more companies delivering this service and others who are suiting up to get their offers in front of consumers. One example is Apple’s recently announced Apple Pay Later which has generated tons of excitement around the release of IOS 16. On the other end, they’ve invoked fear among other service providers who know how influential Apple is. Apple Pay Later follows the general concept of splitting a payment equally into four with each payment made every two weeks. Additionally, there are no fees involved or interest added on. We will see the extent to which they dominate this market when released this fall. For now, let’s learn a bit more about this business model:
Why BNPL?
Why would businesses and consumers move towards a service like this? Consider for a moment how credit and debit cards are the dominant methods of payment around the world. There is a level of convenience and comfort involved when you have that period before you’re handed the bill. Additionally, there is a lot of responsibility when holding a card like debt, interest accumulated from that debt, and fees. BNPL took this and made it simple, which is especially what the younger demographic loves. It is simple in the sense that payment timelines are flexible without hurting a direct credit score like monthly credit card payments. You can even in some cases pay something off over 12 months if you wanted. Though it must be noted that there is just as much responsibility when going this route, it just makes the process more flexible.
With the convenience aspect comes increased traffic both in transaction execution and clientele growth rate. As we’ve already outlined, this is because there is no longer a fixed price of the asset, at least in the eyes of consumers. What was expensive before is now “manageable” when you can have the item right then and there and not pay the whole sum in one shot.
When it comes to the cost of businesses implementing this service, it is no more expensive than accepting credit cards. This means that vendors make their profit by taking those cuts of retail purchases which is similar to interchange rates with credit cards. For a business to implement BNPL, it is not far outside the scope of anything they're used to. From a purely conceptual standpoint, who’s to say this doesn’t replace traditional payment methods?
Consumer Benefits of BNPL:
A Balance For Those Without Credit Cards: Nearly 30% of Americans don’t hold a credit card which is problematic for several reasons— but that is a whole different subject. Additionally, more than 50% of credit card holders have maxed one out before. Additionally, service providers allow you to use them as a credit card by providing a virtual card number for purchases upon request. That card will cover the amount needed for the upfront purchase which you will then pay off like you would a credit card. The psychological effects of BNPL are similar to charging something to your credit card. The purchase becomes a “focus for later” and consumers can get what they want when they want it.
Flexibility: There are many contributing factors to this aspect of BNPL services since they are designed to provide more time to align one's money. The possibilities are seemingly endless for BNPL services, for example, you can split up payments between vendors and a personal debit/credit. There are options for shorter loan periods which, if payments are made on time, allow you to borrow money interest-free. The combinations go on but the point remains; it provides options, and that is what influences consumption.
Soft Credit Checks: Since this is still a business providing loans and trusting that users will make payments, vendors need to validate their users. Contrary to hard credit checks like you’d see with a credit card company or bank, soft credit checks do not impact a credit score. These are simply to ensure applicants meet specific criteria to assess how much risk they’ll be taking on with each user.
Why Would Your Business Use BNPL?
There is a level of hesitation that consumers are facing at the moment and many are focusing on just the essentials due to inflation and recession speculation. By companies implementing flexible payment options, it is a great PR tactic to express care for customers. For example, Affirm says retailers using their service have seen order values increase by over 80%. Another example is FinTech giant Klarna which grossed $80 billion through merchandising volume in 2021.
So the increased purchase execution rate is one thing and the flexibility is another positive data point. Ultimately, the expression that retailers are showing by keeping up with the times is attractive to consumers who want to do the same. This is in addition to the emphasis on care demonstrated by offering options that suit their needs.
Written By Ben Brown
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