Buy now pay later (BNPL) solutions offer customers the ability to immediately indulge in purchases online and spread their payments over time in installments.
For brands, this option can reduce abandoned cart rates by providing an alternative payment method at checkout. One research study suggests that checkout friction resulted in over 34 billion in missed revenue in the U.S. That’s the equivalent of almost 7% of US digital sales for 2018.
For shoppers, installments are a money-saving alternative when compared to using credit cards, which on average charge a 18.61% interest rate. In a time of economic instability and record low unemployment, fears of debt are driving consumer interest towards BNPL solutions.
Read on to learn the benefits and challenges of buy now, pay later (BNPL) solutions for Shopify merchants and consumers, and the top BNPL payment solutions available in the market today.
What are the Benefits of BNPL?
Fulfills consumer desire for instant gratification and inability to pay upfront.
As consumers are looking to invest in products they want, many are gravitating towards BNPL payments for the flexibility it offers.This is because it helps consumers who are seeking a balance between the immediacy of acquiring products and the long-term needs of budgeting.
The financial impacts of COVID-19 are also influencing consumers to seek alternative payment methods. Many consumers are attracted to BNPL options because they offer benefits such as low interest fees and no late fees. This differs from using a credit card which requires a pre-approved credit line and credit checks against a consumer’s record.
Additionally, ongoing debt can lead to negative impacts such as lowering a consumer’s credit score. BNPL merchants appeal to shoppers because purchases are processed directly on a merchant’s Shopify store with a lower level of perceived risk.
BNPL point of sale (POS) solutions offer perceived advantages over credit card interest fees, late fees and penalties, for example:
- Affirm shows transparency about the total amount of interest paid (15% APR).
- Afterpay doesn’t charge interest at all, though they include late fees if payment deadlines are missed.
- Klarna offers no interest if the item is paid in full in the first year. The company also extends payments up to a 36 month period at a reduced annual interest rate.
Increases AOV (average order value) and checkout conversion rate.
The BNPL market is growing rapidly, with growing space including Affirm, Clearpay, Afterpay, Klarna, Sezzle, and similar solutions such as PayPal and Square.
Klarna, for example, helps customers add financing at checkout to pay for their purchases overtime and at a comfortable pace. Klarna says that customer financing boosts sales, by always having shoppers pay upfront and in full.
This buying freedom is what Klarna says it offers customers:
- A 60% increase in average order value with Klarna Financing
- 20% increase in checkout conversions when shoppers choose Klarna financing
With over 15, 000 merchants or brands planning to offer BNPL, this trend is clearly gaining traction. The rise of flexible payment options helps brands increase their bottom line, in addition to providing financial freedom to indebted consumers.
Increases brand sales, and helps indebted consumers get peace of mind.
Buying an expensive item online is a situation many shoppers would normally avoid. That’s why Diff’s client Leesa introduced mattress financing to help their customers pay over an extended period of time, and on their own terms. The company partnered with Affirm to offer payment installments, which are often a deciding factor that determines whether a sale is made or not.
“Many people aspire to own one of our beds, but may be hesitant to pay $1,000 upfront. Paying with Affirm is a way we can make it happen for them in a trustworthy, clear way.” said Matt Hayes, a founding team member of Leesa and the company’s Head of Marketing.
An A/B test showed that once Affirm was offered to Leesa customers, they were 4.5% more likely to add a mattress to their cart. In addition, the conversion rate among these shoppers was 8.25% higher than shoppers not exposed to Affirm. Revenue per visitor also increased by 8.7% among customers using Affirm for payments.
This example demonstrates that brands on Shopify can design, set up and manage buy now pay later options for customers. This gives customers flexibility for payment, while increasing performance and driving sales for brands. “We’re married to Shopify, where we’ve built our site, so Affirm’s tech integration with the platform made it so easy,” said Hayes.
Appeals to Millenials and Gen Z shoppers who want to stay debt-free.
Young adults are unlikely to pick up the old habit of paying with credit cards, according to research by Bankrate and Princeton Survey Research Associates. Over 60% of Millennials, aged 18 to 29, do not have any credit cards under their name.
This is largely because Millennials grew up during the The Great Recession. This generation was hit hard as they were reaching adulthood amidst a financial crisis and its recovery period. “They grew up in a world where the economy was tanking, explains David Pommerehn, Senior Counsel with the Consumers Bank Association in an interview. “There was great concern about jobs and debts and paying off bills.”
BNPL options tend to appeal to Millenials and Gen Z shoppers, with a recent study showing that 67% of Millennials use this service. Millennials carry an average of $27,000 in debt, not including mortgages, according to a study by Northwestern Mutual. Gen Z consumers carry an average of $14,700 in debt, the oldest of whom are now 22 years old.
BNPL helps these younger generations take on more traditional credit, instead of driving them further into debt. Affordable payment installments remove the burden of having to make a purchase upfront. By providing a flexible series of payments, BNPL solutions allow younger generations to invest in items they really love while sticking to a budget they can afford.
What are the Challenges of BNPL?
Creative packaging and marketing can hook young consumers to take on more debt than they can handle.
Customers who fall behind on their payments can significantly damage their credit score. This is why consumers, especially younger generations, must remain conservative in their buying decisions.
Inability to make payments can also reduce customer lifetime value, resulting in lower sales from indebted shoppers. In a Compare the Market survey, more than 40% of BNPL users were unaware of the effects missed payments could have on their credit scores. An additional 20% of respondents also felt they weren’t clearly shown the terms and conditions, raising concerns about brand trust.
This is why it is important for brands to be transparent with customers. Providing clear terms and conditions of repayments can help buyers become aware of any risks involved. This way, they can also make more informed financial decisions.
Potential administrative costs and follow ups if credit cards expire, or if customers stop making payments.
A potential headache for merchants is if customers don’t follow through with their repayment schedule, or if their credit card expires. Normally, this would require administrative follow ups, seeking a legal course of action, or hiring a collection agency.
However, depending on the BNPL solution you choose, the onus on retailers for missed payment costs can be avoided altogether. For example, Shopify Pay Installments will pay retailers upfront, risk-free so they never have to worry about collecting future payments from customers. This will ensure merchant stores powered by Shopify to focus on their business, rather than chasing missed payments from their customers.
Buy Now, Pay Later Options for Shopify
At Shopify Reunite, Shopify announced Shop Pay Installments. This is Shopify’s new buy now, pay later option that will let merchants offer more choice and flexibility at checkout. Its aim is to give consumers the option to split purchases into four equal payments over time, interest-free with no additional fees to consumers.
Shopify will launch Shop Pay Installments later this year with availability to U.S. merchants eligible for Shopify Payments.
Sezzle helps customers pay over time, with a customer’s entire order split into 4 interest-free payments scheduled over a 6 week period. With no interest ever, there are no additional fees as long as the shopper pays on time. There’s also no credit impact or damage to credit scores with an instant approval decision making process.
Paybright provides flexible interest-free payments in either 4 equal bi-weekly installments, or equal monthly payments from 6 to 60 months. This allows customers to apply for an instant loan that lets them pay off an investment over the course of a year.
For example, Diff’s client Polysleep partners with Baybright to offer a six months mattress-financing plan with 0% interest. This partnership makes mattresses that can cost over $1,000 more reachable, especially for young consumers who are shopping online.
Affirm offers easy, quick financing on simple terms without hidden fees. Shoppers who choose Affirm at checkout will not have any prepayment penalties to their credit score. If a shopper wants, they can pay their loan back before their final due date.
Klarna offers direct payments, pay after delivery options and installment plans that let consumers pay over 4 easy installments. The company ensures full transparency so there is no added interest when shoppers checkout in the Klarna app.
BNPL Payment Options Will Help you Attract More Customers
High interest rates and fees can be a major deterrent for customers looking to make a significant investment online. To overcome this challenge, buy now pay later solutions can help balance your shoppers’ immediate purchasing needs with longer term financing goals.
By offering BNPL on your Shopify store, you can increase retail sales by making your products more affordable for shoppers to checkout. Providing this payment option also lets your shoppers know you want to make it easy for them to buy in your store.
Neil Patel writes on his blog that 56% of shoppers expect a variety of payment options at the checkout page. This means that over half of customers would appreciate the ability to make payments in installments. Especially in times of economic concern, more shoppers will likely be seeking out this option.
As shoppers look for alternative payment methods, the ecommerce world is following suit. In fact, one third of ecommerce businesses are planning to offer purchase financing in the next 12-24 months. This is on top of the 30, 000 merchants who use Afterpay, and 2,000 that use Affirm.
BNPL will also help you attract Gen Zers and Millennials to your store who tend to avoid credit cards due to fears of accumulating debt and high interest rates. This is why providing your younger generations with flexible payment options can lead to better reviews, and higher customer loyalty.
Provide Flexible Payment Options to Boost Your AOV
Buy now, pay later options benefit merchants and shoppers equally. These solutions provide immediate access to making a purchase while ensuring financial stability.
And, flexible options are attractive to consumers regardless of how “big ticket” a purchase is. Some might use BNPL to finance a large purchase, like an engagement ring. But others will use it for small purchases like apparel, shoes or makeup.
For example, Diff’s client Anine Bing partners with Klarna to enable customers to pay in 4 easy interest-free payments. US shoppers can shop the styles they love, and simply choose Klarna at checkout to buy now, pay later.
The digitally driven BNPL is gaining speed, and is here to stay. Thousands of online stores are transforming their checkout experience to include buy now, pay later options. It is meeting consumers’ needs to get what they need online, easily and affordably. This is why these tools will help brands attract more customers and boost average order value (AOV).
To learn more about how Diff Agency integrates buy now, pay later solutions into Shopify stores for merchants, contact us.
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This article originally appeared in the Diff Agency blog and has been published here with permission.
