[.blue]Buy Now Pay Later (BNPL)[.blue]: What eCommerce retailers need to know
June 20, 2022
Our recent blog post about subscription products touched on how the cost-of-living crisis is forcing shoppers to rethink their spending. Similarly, this article explores the influence of Buy Now Pay Later (BNPL) on consumer behaviour and what it means for eCommerce retailers under the current economic climate.
If you’re part of the 87% of Britons who have shopped online recently, it’s likely you have come across, if not already taken advantage of the option to buy now and pay later (BNPL).1 Although buying via credit is not a new concept, its popularity has exploded in the aftermath of the COVID-19 pandemic, with BNPL marketed as a manageable, hassle-free option for shoppers. A growing number of eCommerce retailers are now offering BNPL services of their own or through third-party providers such as Klarna, Clearpay, Laybuy, PayPal Credit, and Shop Pay Installments from Shopify.
What is Buy Now Pay Later?
Buy Now Pay Later (BNPL) schemes do exactly what they say – they allow consumers to pay for goods and services on credit, which is then repaid at a future date or through pre-arranged instalments over a few weeks or months, often interest-free. The obvious appeal of this short-term financing option is that it enables buyers to conveniently delay or spread the cost of their purchases and free up cashflow. Younger generations are far more likely to use BNPL services than others, with 54% of millennials and 50% of Gen Z using this online payment method the most.2
How does Buy Now Pay Later work?
Choosing BNPL at the checkout of a participating retailer means that the bill will be paid in full by the BNPL provider. The customer is then required to repay the interest-free amount at a later date or via instalments over a short-term, fixed-payment schedule. In either case, the customer is told upfront what they will need to pay – instalments are usually equal amounts charged over a few weeks or months. Although the terms and conditions of BNPL schemes vary, most providers charge late or missed payment fees that can accumulate if left unpaid. It’s comparable to any other sort of unsecured personal or consumer loan.
It's important to note that a soft credit check is performed whenever a customer applies for BNPL, which shouldn’t affect their credit score. However, as of the 1st of June 2022, Klarna has started sharing BNPL purchases made in the UK with the credit reference agencies (CRAs), Experian and TransUnion.3 This move comes ahead of the UK government’s plans to eventually regulate the BNPL sector.4 The CRAs expect that the data provided by Klarna will impact credit scores by the end of the 2022, but this data is now available for other lenders to view on credit files. This means customers’ BNPL habits can already affect their likelihood of being accepted for other traditional forms of credit like loans and mortgages.5
What does it all mean?
Opinions on BNPL are divided. Many say BNPL makes it all too easy for the unprepared to spiral into debt, especially under an economic climate that is pushing household finances to their limit and forcing consumers to borrow from traditional lenders to cope with the cost of living.6 Even more worrying is the fact that young shoppers aged 18 to 34 are more likely to borrow through credit cards in order to pay off BNPL purchases, which can plunge them further into debt.7 This is one reason why the sector is likely to face greater regulation, ensuring a standardised approach that provides consumers more protection.
On the other hand, many people see BNPL as a useful tool that offers an extra degree of affordability and flexibility to shoppers. Particularly for younger people with less spending power than older generations, BNPL can make big-ticket items or necessary purchases more accessible through delayed and staggered payments. This offers no-strings convenience and a degree of control not found in traditional credit, which often comes with high interest rates and fees.
With the eCommerce market showing no signs of slowing, and Apple expected to join the BNPL movement with its Apple Pay Later service, there is potential for BNPL to gain further ground in the future – albeit under more regulatory oversight.8,9 Many of the retailing giants like Amazon and ASOS are already offering BNPL options to customers and if you haven’t already joined them, you could be failing to capitalise on another means of growing your online business.
3 reasons why eCommerce retailers offer BNPL
When 19.4 million people in the UK alone have used and continue to use BNPL services, it’s clear that this payment method holds value for many consumers, but why do some eCommerce retailers offer it?2 What’s the benefit?
1. Boost online conversion rates
Customers often get excited to buy products from their favourite eCommerce stores, only to get to the checkout and balk at exactly how much they’ll have to pay for their goods. Even those in a stable financial position can sometimes shy away from going through with a costly purchase. In fact, 32% of shoppers abandon their cart when they find out that the overall price is too high.10 One way in which online retailers can combat cart abandonment is by offering BNPL, which can increase conversion rates by 44%, demonstrating the importance of optionality at checkout.11
2. Increase in order value and volume
In addition to boosting conversion rates, the ability to spread the cost of goods interest-free over time can encourage shoppers to spend more, especially on big-ticket items. Global market retailers who offer BNPL via Klarna have reported a 55% increase in average order value (AOV), with almost half of customers saying that they would not have completed a purchase if Klarna was not available.12 According to Shopify, eCommerce brands that offer Shop Pay Installments can increase AOV by up to 50% and benefit from up to 28% fewer abandoned carts. Splitting the cost of big purchases without the worry of interest charges ultimately gives consumers the confidence to take the plunge at checkout.
3. Strengthen customer loyalty
Offering consumers the flexibility to shop and pay the way they want can help improve customer loyalty, encourage repeat business, and thus boost sales. A study by Netfluential and PayPal found that of consumers aged 18 to 39, 28% are more likely to shop at a retailer again if they offer a BNPL option. The Senior Vice President and General Manager of Global Credit at PayPal, Doug Bland, says, “If using a commerce tool like pay later can increase consumer loyalty, it moves from a must-have to a foundational customer experience.”13
The bottom line
As the world of eCommerce continues to grow and evolve, it’s unsurprising that payment methods will too. Customers want greater flexibility and freedom in purchasing goods online, especially given the increasingly unstable and unpredictable economic landscape. Instant credit and deferred payment arrangements that are interest-free make an incredibly appealing package for customers, and with higher conversion rates, order values, and sales at stake, BNPL might need to be part of your online checkout process. Just be sure to consider your options and determine whether this financing method is right for your business and your customers.
Gilson leads the dynamic marketing team at Zendbox in producing insightful content designed to help eCommerce businesses scale up. With over 20 years of digital marketing experience, Gilson is highly adept at discovering business hacks and providing solutions to impossible problems.
1 Statista. (2022) Share of individuals who made purchases online in Great Britain from 2008 to 2020. Link https://www.statista.com/statistics/275968/online-purchasing-penetration-in-great-britain/. [Last accessed: 09.06.22].
2 Johnson, G-R. (2021) Buy now pay later (BNPL) statistics. Finder. Link: https://www.finder.com/uk/buy-now-pay-later-statistics#:~:text=According%20to%20our%20research%2C%20younger,use%20buy%20now%20pay%20later. [Last accessed: 09.06.22].
3 Marsh, A. (2022) All you need to know about Klarna sharing BNPL payments with credit reference agencies. Klarna. Link: https://www.klarna.com/uk/blog/all-you-need-to-know-about-klarna-reporting-bnpl-payments-to-credit-reference-agencies/. [Last accessed: 09.06.22].
4 Lekarski, P. (2021) Buy now, pay later firms to be regulated – and all shoppers will face affordability checks. MoneySavingExpert. Link: https://www.moneysavingexpert.com/news/2021/02/bnpl-industry-to-be-regulated/. [Last accessed: 09.06.22].
5 Flanders, J. (2022) Klarna will NOW share your buy now, pay later borrowing data with Experian and TransUnion – here’s what it means. MoneySavingExpert. Link: https://www.moneysavingexpert.com/news/2022/05/klarna-buy-now-pay-later-experian-transunion/#:~:text=Repayment%20data%20from%20Klarna%20won,scoring%20mechanism%20to%20include%20it. [Last accessed: 09.06.22].
6 StepChange. (2022) Cost of living pressure rising as a cause of debt, as borrowing increases in March. Link: https://www.stepchange.org/media-centre/press-releases/cost-of-living-pressure-rises.aspx. [Last accessed: 09.06.22].
7 Citizens Advice. (2022) Two fifths borrowed to pay off Buy Now Pay Later. Link: https://www.citizensadvice.org.uk/about-us/about-us1/media/press-releases/two-fifths-borrowed-to-pay-off-buy-now-pay-later/#:~:text=Younger%20shoppers%20were%20most%20likely,But%20the%20sector%20remains%20unregulated. [Last accessed: 09.06.22].
8 Chevalier, S. (2022) Retail e-commerce sales worldwide from 2014 to 2025. Statista. Link: https://www.statista.com/statistics/379046/worldwide-retail-e-commerce-sales/. [Last accessed: 09.06.22].
9 Hern, A. (2022) Apple unveils buy now, pay later feature and redesigned iPhone lock screen. The Guardian. Link: https://www.theguardian.com/technology/2022/jun/06/apple-redesigns-the-iphone-lock-screen-in-ios-16-at-wwdc?via=indexdotco. [Last accessed: 09.06.22].
10 Statista. (2018) Products and service categories most commonly abandoned in their digital shopping carts by internet users in the United States as of March 2018. Link: https://www.statista.com/statistics/232285/most-common-products-services-abandoned-digital-carts-internet-users/. [Last accessed: 09.06.22].
12 Klarna. (2020) Fast-track Upturn: Disrupting customer acquisition for 2020 and beyond. Link: https://www.klarna.com/assets/sites/4/2020/06/05175256/Storyation_KLA-CLV-Report_v2-compressed.pdf. [Last accessed: 09.06.22].
13 PayPal. (2021) Buy Now, Pay Later Has Been Around for a While. Why Is It Exploding Now?. Link: https://newsroom.paypal-corp.com/2021-06-09-Buy-now-pay-later-has-been-around-for-a-while. [Last accessed: 09.06.22].