Buy Now, Pay Later: What to Consider Before Making the Investment

Buy Now, Pay Later: What to Consider Before Making the Investment

By: Eric Christensen
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This article originally appeared in TotalRetail.

Global e-commerce is undergoing a transformation as COVID-19 continues to bring a massive shift in consumer habits and a surge in online shopping. Social distancing and shelter-at-home requirements have consumers turning online to buy everything from food and household goods to electronics and clothing. While the overall volume of e-commerce transactions received the bulk of attention in 2020, another rising trend is the diversification of payment methods to fuel the flow of e-commerce.

As e-commerce continues to grow, online payment strategies have become more important than ever. How merchants accept, process, reconcile and manage payments, especially on a global scale, has a direct impact on conversions and revenue. One payment method experiencing tremendous growth in customer adoption is buy now, pay later (BNPL), an option that allows consumers to pay for goods and services in installments over time, often without interest. According to one recent analysis, the global BNPL platforms market was valued at $7.3 billion in 2019, and is expected to reach over $33.6 billion by 2027. In November, BNPL provider Klarna reported a record 11 million customers in the U.S., a 106 percent year-over-year increase.

Paying in installments isn’t a new concept; however, recent financial technology has helped to develop a risk algorithm that’s making the method profitable for merchants. At the same time, younger millennials are demanding choice and are more careful about using traditional credit cards. The current economic climate is expanding the audience for installment plans to older generations that might previously have been uncomfortable with the idea. Individuals laid off or furloughed are likely to be very conservative when it comes to spending, and BNPL offers those consumers the ability to control payments and avoid putting a large purchase on a credit card. It also gives consumers the ability to buy something now rather than having to save up for it.

While more consumers, and even B-to-B customers, are looking for BNPL, merchants must carefully consider the benefits and risks of implementing this payment option before adding it to their online stores.

The Benefits

One of the biggest attractions for brands looking to add BNPL as a payment option is the opportunity to increase revenue. Digital River found brands in the U.K. and Europe saw a 3 percent to 10 percent lift in gross revenue after adding a BNPL option. Another benefit is the potential increase in average order value (AOV). It’s a key selling point for payment providers, including PayPal, which touts at 56 percent increase in AOV with pay-over-time messaging.

Other benefits involve what happens after the transaction. Among them, the BNPL provider assumes the risk of nonpayment and remits funds at the time of shipment, making the merchant whole immediately.

Potential Challenges

A major consideration for merchants is potential revenue lift might not exceed the increased cost of offering BNPL financing. A merchant generally pays a third-party financial technology provider a certain percentage per transaction. As such, merchants need to make sure the margin on the product is big enough to withstand that fee. If a merchant is geared toward selling smaller items that won’t produce that margin, they can consider adding a different payment method like one-touch purchasing to encourage transactions.

Another concern is BNPL financing might be confusing for some consumers who aren’t as familiar with technology and prefer a more traditional buying experience. To avoid any confusion or concern, make sure you proactively educate consumers with on-site messaging to make them more comfortable using new payment methods.

Weigh all options and consider the benefits and risks before implementing BNPL. By adding the right payment method and doing it responsibly, merchants can optimize conversion rates and create a seamless payments system that helps drive sales and global e-commerce revenue. In trying to predict the next e-commerce trend, the most important thing to keep in mind is the more you reduce friction in the buying process, the better off you’ll be.

Eric Christensen is chief payment officer/vice president of product at Digital River, a completely integrated solution for all the back-office functions of e-commerce. Digital River enables businesses to sell across the world with a single connection to the platform of your choice.