Why retailers accept purchases now and pay for financial services later


The supply chain is groaning and manufacturing is limited. For weeks, the headlines sent a clear message to shoppers: shopping this holiday season is fast.

In recent years, hasty shoppers may have turned to reservation plans to reserve holiday gifts and pay for their purchases over time. However, many retailers, including the country’s largest Wal-Mart, have eliminated or reduced these programs. One of the reasons is that buyers are free to use new tools to distribute their payments.

A popular option for consumers is to buy now and pay for the plan later. Retailers are also big fans. Point-of-sale loans are easy to manage for retailers, and research shows these options lead to larger carts and increased customer loyalty. RBC Capital Markets estimates that the BNPL option will increase retail conversion rates from 20% to 30% and increase the average note size from 30% to 50%.

Adding additional sales

“It’s about getting additional sales or increasing consumers,” said Russell Isaacson, director of retail and auto lending at Ally Lending.

According to Kearney’s associate partner for financial services operations, Hemal Nagarches, payouts provide consumers with choice and convenience when it comes to budgeting and purchasing. He also said the option would increase trust between retailers and consumers, leading to “increased sales, increased average purchase size and increased frequency of purchases.”

Buy now and pay later. Payment plans from companies like Affirm, Afterpay in Australia, and Klarna in Sweden are especially appealing to young buyers such as Gen Z and Millennial consumers. is. Each plan varies in the number of payments on specific terms, but an important similarity is the promise of a handful of equal payments in a relatively short period of time, with no hidden fees. In many cases, the plan is irrelevant.

Installment payments are popular with consumers who don’t have credit or don’t want to buy with a credit card for a variety of reasons. According to Hans Zandhuis, president of Ally Lending, this option makes a lot of sense for buyers who don’t have the money to cover the full purchase, but will pay a few salaries in the future.

According to Zandhuis, the average transaction value for a buy now is around $ 200 and you will have to buy it later. In many cases, the retailer’s checkout amount was around $ 100 if the option to pay later was not available, he said. This allows the same consumer to spend $ 175 to $ 200, and a four-month payment of $ 50. Payments are meant to match the payroll cycle.

For example, consider the clothing retailer Rue21. Its main demographic are women between the ages of 18 and 25, who often do not use credit cards. Increasing the average order volume is a high priority as the website has a large number of items at low prices and the traffic in the mall is dropping.

When the pandemic closed the store, Rue21 had to find a way to sell it to online shoppers without credit. According to a case study published by Klarna, Rue21 added Klarna as an in-store and online payment option, so its average order volume is 73% higher than other payment methods. Rue21 buyers who do business with Klarna buy 6% more often and have the highest sales per customer. In May, Klarna’s purchases represented more than a quarter of street online sales21.

Logo sign outside of the rue21 retail store in Chambersburg, PA on January 25, 2019.

Kristoffer Tripplaar | Sipa via Associated Press Image

Affirm boasts that merchant customers report an 85% increase in average order value if consumers choose to use the BNPL plan over other payment methods. Affirm approves installments totaling $ 17,500. This turned out to be very important to Peloton’s expensive training equipment and services. FTP artners, an investment bank focused on the FinTech industry, estimated that 30% of Affirm’s revenue in the first quarter of 2021 came from sales on the Peloton website.

The Klarna Merchant Base reports that when buyers pay more than four times, the average order value increases by 45%. Buyers can also pay the full amount without interest for 30 days, or for large purchases, pay monthly for 6 to 36 months and increase an annual rate of 0% to 29.9%.

new customer

Attracting customers who may not have otherwise been upset by retailers is another benefit of offering the ability to buy now and pay later.

Earlier this year, Macy’s CEO Jeff Gennette told investors that the partnership with Clarna is helping to attract new customers.

“In October, we launched Klarna on the Macy’s website. [2020] Since then it has expanded to Macy’s, Bloomingdale’s and Blue Mercury, both online and in-store, ”he said. Our goal is to turn all of these new customers into loyal Macy’s customers who come back for future purchases. “

About 93% of the total value of post-payment products in the most recent fiscal year came from repeater payment services, with the oldest consumers trading more than 30 times per year.

Higher conversion

By paying in installments, retailers can [consumer’s] Chris Bentley, vice president of SS&A’s global consulting group, said he “wants to sell” and “is breaking down credit barriers.” Attractive via BNPL and ultimately attractive enough to generate conversions. This is the main goal of all digital commerce sites. “

A Similarweb analysis of the Top 100 US Fashion and Retail Sites compared 50 merchants who offer the option to buy now and pay later at checkout, and 50 merchants who don’t. On average, sites with the BNPL option had a conversion rate of 6%, while sites without the option had a conversion rate of 4%.

Afterpay said it will increase conversion rates and additional retailer sales by 20-30% compared to other payment options.

The increased revenue and conversions will also increase the transaction costs that retailers pay to fintech companies. “Mathematics speaks for itself. The extra revenue is a cost, ”Zandhuis said, as retailers pay BNPL companies an additional transaction fee 2% higher than the transaction fee charged by traditional credit card companies. Higher than. “

Afterpay and Clarna charged the merchant a 3% to 5% transaction fee, and Affirm refused to disclose the transaction fee.

This program also has an advantage over traditional reserves, where items purchased by retailers must be stored on-site while customers make payments over time. Retailers are increasingly using their stores as mini-distribution centers to process online orders. Storage space is valuable for this model.

Growth opportunities

According to FIS Worldpay, buy now and pay later is the fastest growing e-commerce payment method in the world, and digital wallet growth is the second. In 2019, the $ 60 billion BNPL market represented 2.6% of global e-commerce, excluding China.

Worldpay estimates that the use of this option will increase at a compound interest rate of 28% per annum and could reach 166 billion dollars by 2023. At this rate, it will represent approximately 5% of the electronic commerce in the world in outside of China. .

BNPL currently accounts for less than 2% of sales in North America, according to FIS WorldPay.

John Harmon, senior analyst at Coresight, recognizes the opportunity for retailers, but doesn’t see it as a panacea.

“BNPL is not seen as a magic bullet because it is a different kind of credit, despite its growing acceptance,” Harmon said.

Leave A Reply

Your email address will not be published.