Buy Now Pay Later Services: What You Need to Know
You’ve probably noticed that when you go to the check out section at online stores nowadays, your payment options seem as if they're multiplying with each day. Far beyond credit cards and PayPal, there are now a plethora of services for micro-loans, which essentially allow shoppers to avoid paying upfront for purchases – like clothes, beauty products or technology – and instead divide the cost evenly across fortnightly deductions.
And lately such services, known "as buy now pay later", have become a great way for reaching new customers as well as increasing store's conversions. And indeed, as surveys show, 4 out of 10 people now are more likely to make a purchase if they're offered an instant financing option with a small interest. As a result, it becomes a win-win strategy for everyone, since both online stores and customer are benefiting from such a purchase.
How Does It Work?
There’s this simple but seductive psychology behind BNPL that makes it so attractive.
Let’s say you’re shopping online and see an amazing dress for $600. Would you consider buying it? Most of us would probably say no. But what if then you got a payment option offering you to split the cost and pay later? A few clicks and now your $600 dress become a set of 4 easy payments for just $150. Doesn't seem as bad, huh? As the item's cost was divided, the product suddenly started looking more affordable, even though in reality the cost stayed the same.
But I ain’t going to lie, I would still totally make that purchase. And so would a bunch of other millennials, as according to a survey, 5 out of 10 millennials believe it’s acceptable to go into debt while shopping during the holiday season.
So basically, BNPL services give shoppers the freedom to choose how to pay and when to pay. It's an enticing alternative to credit, as interest rates are actually smaller, which makes them more effective in increasing sales and customer loyalty for your brand.
So if you're considering to add one of these financial options installments to your shop, here is what you need to know about BNPL services beforehand.
1. BNPL services are preferred by younger customers
Buy now pay later services have rapidly grown in popularity during the last couple of years, and it’s younger customers that are actually driving this trend. Younger generations trust traditional financial institutions much less than older generations, but they still need convenient ways to split the cost and pay over time. According to ASIC, over half of BNPL users are aged between 18-34 years and 4 out of 10 of these users are students or work part-time.
So this makes BNPL act as a modern version of layaway for them, giving the customers freedom to pay over time without having a credit card. And lately, more and more big brands have begun offering such payment methods, meaning BNPL is becoming something that customers expect everywhere.
2. Buy Now Pay Later Services are a Great Way for Reaching New Customers
If you want to reach out to more new customers, it is no longer enough to offer only credit card options. Of course, credit cards are a great purchasing tool, but only for those customers who have them. However, the number of credit cardholders in your target audience might be fewer than you think, as today only 1 in 3 millennials own a credit card.
So to increase your audience reach, consider expanding your payment options, such as through digital wallets, installment financing plans or alternative payment platforms.
3. BNPL Increases Sales
30% of online shoppers that have used BNPL services say they probably wouldn’t have made the purchase at all if they weren’t offered a financing option. So including BNPL can become an effective way for improving your sales and order values - leading to up to a 30% increase in merchants' average order value, as PayPal has reported.
4. Buy Now Pay Later Services Increase Conversions
Did you know that more than 2 out of 3 of all online shopping carts are abandoned? One of the most commonly mentioned reasons for that is that the cart cost was too expensive for the customer. So offering a financial option that lets shoppers check out now and pay over time can dramatically reduce cart abandonment rates.
As an example, online stores that have added Klarna, Afterpay, Affirm or any other BNPL service to their stores, report a 38.7% increase in their checkout conversions for the first time visitors.
5. BNPL Services Are Booming, But The Industry Is Still Under-Regulated
Because companies like Afterpay, Klarna, Quadpay or Affirm don’t charge interest on purchases – just late fees if users fail to pay on time – they aren’t required to check the customers like traditional credit companies or to follow the same level of government scrutiny. As Julia Davis from FRLC said: “It’s like the wild west”. And nobody is regulating it.
So basically, BNPL services don’t need to check if a customer can actually afford to pay back these debts before they give the credit. They’re not considered as credit providers, so they don’t need a credit license. And this can lead to their encouraging customers to get in debt they won't be able to pay back. So even if it’s not considered credit under the law, it’s absolutely a debt and you need to take this into account when considering using BNPL.
Buy now pay later services are a great tool for reaching new customers and increasing your online sales and conversions, especially if your product’s target audience is younger generations. But as you consider which payment methods to use, don’t forget to think of the customer first. In the customer’s mind, the whole payment process is an extension of your store. And a bad payment experience - whether it involves hidden fees or high-interest rates - leads to a negative shopping experience at your online store.
But still, I would suggest adding these financing options to your store, especially during these times. As I said before, it’s a win-win-win strategy, and if everything goes well, shopping brings value to everyone.