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Should your store adopt ‘buy now, pay later’?

3d graphic of a shopping cart on a purple backgroun. above are the words ‘buy now’ and next to it are the words ‘pay later’.

There’s yet another revolution sweeping the world of retail – and it’s called buy now, pay later.

It’s likely that you’ve already heard of this much-adored payment model which is expected to turn over $680 billion worth of sales by 2025. So the big question is: Should your store be jumping on this bandwagon?

That’s exactly what Whiplash is diving into today. We’re going to cover:

  • The definition of buy now, lay later
  • The trends supporting its growth
  • The pros and cons to bringing buy now, pay later into your online store.

What is buy now, pay later?

‘Buy now, pay later’ (BNPL) is a payment model offered by third parties where consumers are given lines of credit to spend at participating retailers. Under this system, the customer will pay a percentage of a purchase upfront, and then pay off the rest within a certain time period.

The selling point? Consumers get to take their purchase home immediately – before they’ve finished paying off the items. This service comes at no extra cost to the consumer unless they begin accruing late fees. To use the service, consumers can select their preferred BNPL provider at online checkout, or else use a digital wallet at brick and mortar stores. There is a wide variety of buy now, pay later systems available, with AfterPay, Klarna, and Affirm being some of the best known.

Harnessing the model frugal consumer

It’s easy to see why BNPL appeals to consumers. It keeps the upfront costs of shopping down, which is advantageous for those who struggle with maintaining cash flow.

Furthermore, studies show that younger consumers are moving away from credit cards in favor of debit-based options, with 60% of millennials and Gen Z viewing credit cards as ‘too risky’. In this context, BNPL presents a much friendlier, more transparent alternative.

Yet it’s also important to acknowledge that this payment model is not a new innovation.

The ‘laybuy’ system gained immense popularity during the Great Depression, as consumers struggled to afford large purchases. However, Laybuy required customers to make payments in-store until they had paid off an item in full –  and only then were they allowed to take it home.

BNPL has taken this same concept and rebranded it to align with the fast-moving landscape of digital commerce, recognizing the growth of an increasingly price-conscious and technologically-savvy consumer.

But signs also show that BNPL is starting to pivot back towards its origins. In February, BNPL merchant Affirm launched a new debit card that allows customers to use the Affirm system at any partnering store location. Meanwhile, Afterpay’s in-store payment functionality is now hosted by over 40,000 stores worldwide.

This steady move into brick and mortar is a sign of BNPL’s increasing acceptance as a mainstream payment solution that offers consumers more flexibility and choice.

So, why should you consider adopting a ‘buy now, pay later’ system?

The pros and cons of ‘buy now, pay later’ for retailers

The pros

   Bigger, better sales

The major advantage of BNPL for merchants is that you receive the full value of a sale upfront, even though the customer is paying it off in stages. This means that you don’t have to worry about cash flow issues or chasing up late payments – your third-party provider will do this for you.

Consumer confidence is buoyed by only having to pay a small percentage of a purchase upfront, meaning they are likely to shop more often – and spend more money. According to a study by Affirm, retailers that offer its service saw an average increase of 20% in conversion and 87% in average order values.

   Enabling better omnichannel experiences

It’s no longer acceptable to offer your customers different experiences online versus offline. With omnichannel retailing fast becoming the norm, consumers expect to make seamless, end-to-end shopping experiences across channels – including how they get to pay.

Retailers continue to fight for more foot traffic amid declining brick-and-mortar sales. When ecommerce allows consumers to shop exactly how and when they want, in-store retailers need to pursue more customer-centric strategies to remain relevant.

Adding BNPL across ecommerce and brick and mortar helps to bridge this perceived ‘convenience gap’ between online and offline, especially when augmented with omnichannel strategies such as BOPIS and in-store orders for home delivery. By empowering consumers to shop on their terms, retailers can enhance brand loyalty and customer satisfaction.

   Business exposure

BNPL services are not just a payment system; they’re a sophisticated brand curation initiative that can be a massive boon for participating retailers.

Because as consumers grow accustomed to the advantages of BNPL, they begin actively searching out other retailers with the same service. This offers your business a valuable marketing opportunity to appeal to new consumer segments who might not otherwise discover your brand.

Services like Affirm use their social media accounts to actively promote retail partners. With their vast follower counts, getting featured means huge exposure to a captive audience. Furthermore, using a BNPL payment service will get you listed on the website’s directory, with further opportunities to get featured on specific category pages.

Some retailers have reported receiving as much as a 40% increase in sales after adding BNPL to their store – a clear sign that buy now, pay later has become a powerful marketing tool.

Hosting a BNPL service also gives you the opportunity to take part in network-wide promotions that attract both new and existing customers. For example, AfterPay’s AfterPay Day initiative earlier this month allowed customers belonging to the AfterPay program to get exclusive discounts at participating retailers:

However, there a few elements of buy now, lay later that retailers need to be aware of before they take the plunge:

The cons

   Business exposure

While BNPL does help retailers attract customers, this comes at a price. Merchant fees for using these systems can be as high as 6%, much higher than traditional credit card options. This is because merchant fees are the main source of revenue for BNPL services.

Moreover, if a customer chooses to return an item – a situation that affects as much as 40% of ecommerce orders – retailers will not have this fee refunded to them. This can seriously erode the product margins from BNPL sales, especially for smaller retailers who cannot rely on large sales volumes.

   The challenges of integration

Adding more payment options gives your customers more flexibility – but it also means more for you to manage. When you adopt any new technology platform, you’re faced with the often complex process of integrating it with your existing systems. Most third-party BNPL services do have native integrations with the major ecommerce platforms such as Shopify, but it’s your responsibility to troubleshoot any issues that occur.

Conclusion: Should retailers adopt buy now, pay later?

It’s a no-brainer why consumers want to see more of BNPL. But is bringing a buy now, pay later option into your store a good growth strategy?

With consumer spending hard hit by the pandemic, adding a buy now, pay later option could be a brilliant way for retailers to increase high-value sales. After a year of disrupted retailing, giving consumers more flexibility and choice will give you a competitive edge. Especially as the industry clamors to get a slice of that pent-up demand.

However, the high fees that retailers need to shoulder means that BNPL might not strengthen your bottom line. In fact, some merchants may find themselves worse off. If you are a small retailer in a high-return product category such as apparel, BNPL might do more harm than good – especially if your existing customers begin converting en-masse.

It’s also worth considering that BNPL services are not currently regulated in the same way as credit card companies. This is because the model charges late fees, rather than interest.  However, several countries are looking at whether BNPL services need stronger oversight to protect consumers.

While there have been recent efforts at self-regulation, future changes could make the model less appealing to consumers or place a bigger burden on participating retailers. As an emerging retail technology, it’s important that retailers keep a close eye on these developments.

It might be easy to introduce buy now, pay later, but it certainly isn’t easy to remove once your customers have grown used to it. So, it’s important to weigh up these pros and cons when we deciding if BNPL is right for you. Best of luck!

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