Why retailers buy now, pay later, use financing services

Supply chains are jumbled and production is limited. For weeks, headlines have been telegraphing a clear message to buyers: buy early this Christmas season.

In recent years, early risers may have made plans to reserve Christmas gifts and pay for their purchases over time. But many retailers – including the largest in the country, Walmart – have eliminated or scaled back these programs. One reason for this is that there are new tools available to buyers to distribute payments.

A popular option for consumers is to buy now, pay later. Retailers are big fans too. The point of sale loans are easy to manage for retailers, and research shows these options translate into bigger shopping carts and greater customer loyalty. RBC Capital Markets estimates that a BNPL option increases retail conversion rates by 20% to 30% and increases the average ticket size between 30% and 50%.

Add incremental sales

“It’s about incrementality,” said Russell Isaacson, director of retail and automotive lending at Ally Lending, “to reach that incremental sale or incremental consumer.”

Installment payments offer consumers options and convenience when it comes to managing budgets and shopping, according to Hemal Nagarsheth, an associate partner in Kearney’s financial services division. He said the option also builds trust between retailers and consumers, resulting in “incremental sales, higher average purchase sizes and higher frequency of purchases.”

Buy Now, Pay Later Payment plans offered by companies like Affirm, Australia’s Afterpay, and Swedish Klarna are particularly attractive to younger shoppers, such as coveted Generation Z and millennial consumers. Although each plan has differences – from the number of payments to the specific terms and conditions – the main similarity is the promise of a handful of equal payments over a relatively short period of time with no hidden fees. Often the plans are interest-free.

Installment payments are more popular with consumers who either do not have access to credit or who do not want to shop with a credit card for various reasons. According to Hans Zandhuis, president of Ally Lending, the option also makes a lot of sense for buyers who don’t have the money to cover the entire purchase but who can survive the next paychecks.

The average transaction value is around $ 200 for a purchase that is paid for later, Zandhuis said. Often times, if the option to pay later had not been available, the checkout value for the retailer would have been around $ 100, he said. This allows the same consumer to spend $ 175 to $ 200 with 4 monthly payments of $ 50. Payments should match the paycheck cycles.

Take the clothing retailer Rue21, for example. The main demographic is an 18 to 25 year old shopper who often does not use credit cards. With lots of cheap items on the site and decreasing traffic in shopping malls, increasing the average order volume is one of the top priorities.

When the pandemic closed stores, Rue21 had to figure out how to sell to its buyers online with no credit. Since Rue21 added Klarna as an in-store and online payment option, the average order volume is 73% higher than other payment methods, according to a case study published by Klarna. Rue21 shoppers doing business with Klarna have the highest sales per customer with a 6% higher purchase frequency. In May, Klarna purchases made up more than a quarter of rue21’s e-commerce sales.

A logo sign outside of a retail store on rue21 in Chambersburg, Pennsylvania on January 25, 2019.

Kristoffer Tripplaar | Sipa over AP pictures

Affirm boasts that its merchant customers report an 85% increase in average order value when consumers choose to use their BNPL plan over other payment methods. Affirm approves installment payments for purchases up to $ 17,500, which has proven very important to Peloton’s expensive exercise equipment and services. FT Partners, an investment bank focused on the fintech space, estimated 30% of Affirm’s revenue in the first quarter of 2021 from sales on the Peloton 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 interest-free within 30 days or, for larger purchases, get financing with monthly payments of 6 to 36 months with an APR between 0% and 29.9%.

New customers

Attracting a customer whom a retailer might not otherwise have influenced is another benefit of offering buy-it-now options.

Earlier this year, Macy CEO Jeff Gennette told investors that his partnership with Klarna is helping the company attract new customers.

“We launched Klarna on the Macy’s website in October [2020] Since then we have scaled it to Macy’s, Bloomingdale’s and Bluemercury both online and in stores, “he said.” With Klarna we continue to see higher spend per visit and increased acquisition of new younger customers, 45% are under 40 years old. Our goal is to turn all of these new customers into loyal Macy’s customers who will come back for future purchases. “

Around 93% of Afterpay’s gross goods value in the last financial year came from repeat users of the installment payment service, with the longest-serving consumer making 30 additional transactions per year.

Higher conversion

Installment payments allow the retailer to “a [consumer’s] Desire into a sale, “said Chris Ventry, vice president of global advisory group SS&A.” It removes the payment barrier, “said Ventry through BNPL is enticing, ultimately enticing enough to drive conversion, which is the primary goal of all digital commerce websites . “

An analysis by Similarweb of the top 100 US fashion and retail websites compared 50 retailers who offer a buy-it-now option at checkout and 50 who don’t. On average, sites with a BNPL option had a conversion rate of 6% compared to 4% for those who didn’t.

Afterpay said it increases a retailer’s conversion rate and additional sales by 20 to 30% more than other payment options.

The incremental sales and increased conversion also make the additional transaction costs that the retailer pays to the fintech companies worthwhile. Zandhuis said that while the retailer pays the BNPL company an additional 2% higher transaction fees compared to the transaction fees charged by a traditional credit card company, “the math speaks for itself. The additional revenue is greater than the 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 the traditional layaway, which requires retailers to store items purchased on-site while customers make installment payments over time. More and more retailers are using stores as mini-fulfillment centers to serve online orders. With this model, the storage space is scarce.

Growth opportunity

Buy now, pay later, according to FIS Worldpay, is the fastest growing e-commerce payment method in the world, followed by the growth of digital wallets. In 2019, the $ 60 billion BNPL market accounted for 2.6% of global e-commerce, excluding China.

Worldpay estimates that use of the option could grow to $ 166 billion by 2023, with an average annual growth rate of 28%. At this rate, it would account for around 5% of global e-commerce outside of China.

According to FIS WorldPay, BNPL currently accounts for less than 2% of North American sales.

Coresight Senior Analyst John Harmon recognizes the opportunity for retailers but does not see it as a panacea.

“I don’t see BNPL as a magical solution, despite its booming adoption, as it’s just a different kind of loan,” Harmon said.


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