We’ve all heard of Buy Now, Pay Later (BNPL) offers. In fact, there’s a good chance that you have recently been presented with a BNPL offer, as online platforms have started using them quite aggressively of late!
BNPL kicks in at the point of sale, giving consumers a financing option that has gone viral—particularly with Millennials and Generation Z (i.e., those born between 1981 to 2009). Indeed, BNPL solutions are a recent development that cuts to the heart of easing customers’ affordability obstructions. The category introduced an impressive agenda aimed at disrupting the markets credit card companies (CCCs) like AMEX, Visa, and Mastercard, attacking the latter’s unreasonably high fees and APRs. In addition, poorly implemented rewards programs have contributed to the worsening credit card image in consumers’ eyes.
An Insider Intelligence study maintains the CCCs’ somewhat inflexible financing system allows their card users to build up massive liability at zero APR and then, within eighteen months, switch the unpaid balance into the mind-boggling realm of 19% to 29% annual charges. Unfortunately, their card users have little choice but to pay up, as cutting into debt at that point is like a mouse trying to get an elephant’s attention.
Moreover, the COVID-19 pandemic messed with consumer habits, substantially turning our lives upside down. One of the things to fall through the cracks was paying bills on time, even making minimum credit card payments. As a result, FICO scores cratered, and access to stable credit went south for many, significantly impacting aggregate credit card usage in the United States.
So, when the BNPL entrepreneurs spotted these glaring gaps in the customer experience, they wasted no time trying to close them with a value proposition that could instantly sway brand loyalty. With a distinctive downtrend evident, it signified that there were possible “riches in the hills” available to BNPL providers able to address the described pain points conclusively. They’re doing something right because the galloping BNPL growth (see below) signifies that retailer-sponsored financing—which energizes BNPL—is not an aberration or a side-financing issue. No, it’s mainstream, and likely to represent the go-to primary funding channel.
How does BNPL work?
BNPL introduces disruptive initiatives designed to churn CCC loyalists by attacking unworkable touchpoints in the credit card usage experience. So, their platform mainly converges on allowing shoppers to buy with a set number of installments over time, bringing the debt back to zero. The drivers behind it all are close to zero APR, and include no hidden fees. Thus, the purchase cost remains unaltered. In perception terms, customers say goodbye to the CCC’s bait-and-switch tactics and hello to transparency, manageability, and real affordability.
Talking more specifically, at checkout, online shoppers will interact with one of three options:
- Pay now.
- Receive the buy-cart merchandise right away for complete payment in 30 days.
- Same as (2) above, but nominate a schedule of smaller payments over more than one month as follows:
- Generally, 3 or 4 equal, interest-free installments.
- For big-ticket items (e.g., refrigerators, furniture), splitting the cost anywhere from 12 to 36 monthly payments. In this case, low APRs may be in the calculation, but with transparency. Still, the latter is likely significantly less than CCC financing charges.
The participating merchants opting for the BNPL option pay the provider a commission of two to six percent of the transaction value. No part of this fobs off onto the payee other than what is noted above.
Finalizing the transaction usually involves scanning customers’ QR codes, which they generate within their BNPL app. At that point, the provider credits the retailer (less the commission), and the customer becomes a borrower.
Retailers are the face offering BNPL as an option. Therefore, consumers tend to think it’s the store (online and brick-and-mortar) dictating the BNPL terms and uncharacteristically offering credit. It’s certainly not the case, because trading businesses want the money instantly, despite customers desiring a payment spread over time. Thus, fintech providers step into the breach to pay the seller and carry the debt. Indeed, if the customer defaults down the line, the bad debt is on the providers’ shoulders—not the retailers’. So, in other words, providers make a double assessment with AI-smart algorithms to evaluate:
- The customer base quality the retailers bring to the party.
- Each customer as an individual debtor.
The combined assessment defines the transaction percentage the provider charges the retailer for taking over the debt without recourse. A poor record will be close to six, and a good one around two percent.
How significant is the BNPL market?
The global BNPL market has developed quickly over eleven years, emerging at $15.91 billion in 2021. The forward look is more exciting, projected to grow up to to $90.51 billion by 2029—a 21.7% compound annual growth rate (CAGR). In other words, the BNPL bandwagon is rolling on, gaining momentum as one retailer after another climbs aboard. But of course, they have little choice if they want to stay competitive. According to a Forbes study, Gen Z BNPL followers have jet-propelled by 600% (and Millennials by 300%) since 2019.
While Gen X and Baby Boomer adoptions aren’t too far behind, the growth of BNPL among the younger generations points to a future where BNPL no longer exists as an alternative payment method but as the primary one.
The Buy Now Pay Later customer checkout experience
Everything outlined above probably sounds simple and streamlined enough. However, no new marketing strategy works unless marketers put themselves in the customers’ shoes and map out the journey touchpoint by touchpoint. Therefore, consider the following:
- The customer locates the item for purchase
- They add it to their shopping cart
- They go to the checkout
- This is what pops up:
- PAY WITH:
- All the participating CCCs
- BNPL providers: PayPal, Affirm, Sezzle, Klarna
- Numerous flexible payment options (BNPL options)
Although the above is an online example, brick-and-mortar stores can participate in BNPL as well. The crucial consideration in both situations is to:
- Not confuse the buyers
- Make it seamless and easy to take advantage of the BNPL choices
- Communicate the no-interest charge benefits to engage the customers and induce them to opt for BNPL
So, it involves issuing the customer—either before or at the point of sale—a payment card (physically or virtual). Here’s the thing: The elephant in the room, the one that can start charging around and upset the entire process, is, of course, that old weight around the neck: credit rating. Why? Because it all depends on the BNPL provider’s policy. According to Investopedia, some do a hard credit check—a whopping no-no for consumers who remember the bad old CCC days, which they may be simultaneously trying to escape. More of the “same old, same old” could easily trigger them to step off the buying journey and look for the goods elsewhere.
Thus, industry leaders apply zero checks (or soft checks). These include Affirm, Afterpay, Klarna, Zip (previously Quadpay), and PayPal. However, even with no protocol involved, it’s naive to believe there’s no emotional pressure cooker at work.
For example, customers may worry about defaulting on their payments. When that happens, the answer is simple: BNPL providers enter the agreements assuming everyone will pay on time and almost always ask for the first installment as the purchase is approved. However, a loan is a loan, whichever way one cuts it. Thus, if payees stutter and upset the schedule, they could be in for one or all of the following: late fees, being handed over to a collection agency, or being reported to credit monitors, resulting in a black mark against one’s FICO score.
Another thing—how long does the BNPL process take, even without a credit check? Cumbersome or technically defective BNPL applications may create aggravation and end in a prospect bouncing prematurely. Even so, as stated above, consumers are substantially interested in BNPL. So it appears the reservations aren’t quite as extensive, making BNPL a popular financing option!
Some critically meaningful benefits that distance BNPL options from CCCs
BNPL provides consumers wary of credit cards and reluctant to use cash with a far more robust solution than either of those alternatives, all while ensuring convenient, flexible, and instantaneous approval.
Here are the three critical differentiators that make BNPL the choice of payment:
- Quick payment: Customers looking for a later date or delayed order can pay upfront as a first installment, thus moving smoothly into the system. The latter ensures no obstructions—delivery, payment, or otherwise.
- Reverse logistics: These days, reverse logistics—customer returns—are a massive part of the customer experience.
According to a UPS study, more than 50% of customers say they won’t buy from virtual entities unable to demonstrate a reliable and functional returns policy. In other words, trying things out, perhaps buying two or three options (think outfits), and returning the unwanted items is hard-baked into customers’ motivations.
So, the BNPL experts have driven home the advantage by creating features like free returns and a dedicated support staff to help deal with these transactions.
- Reduced upfront cost: According to the Baymard Institute, cart abandonment often happens because customers see the high sticker price and visualize the cash leaving their bank account. BNPL attacks this “turn-off” head-on by fractionalizing it into bite-sized pieces that are considerably more palatable.
Indeed, fractionalizing items selling for $1,000 or more with zero APR additions creates word of mouth, leading to new Millennial and Gen Z customers, with escalating conversions of larger-than-average basket sizes.
Selecting the right BNPL provider for your business
Step 1: Know your customer—the products and services they want, the prices they’re ready to pay, and what motivates them the most.
Step 2: Calculate your average order value (AOV)
Step 3: Match your defined customers to the BNPL provider that can serve them best using AOV and other key factors (see below) as yardsticks.
Installment periods: BNPL entities’ multiple installment options can range anywhere from a fortnight (i.e., two weeks) to thirty-six months. Thus, your AOV is a critical consideration when choosing from providers that focus on specified lending periods. In other words, steer clear of long-term BNPL providers if your AOV is in weeks and vice versa if it’s in months or years.
Credit limits: Another primary consideration is the credit limits that suit you best. BNPL providers transparently state their maximums and minimums, so combine this metric with your AOV to settle on a short list of suitable lenders.
Industry and region focus: In addition, active BNPL funders are not always national and suitable for every industry. Instead, the evaluation will reveal their specialty markets, states, and countries.
Finally, a competitive analysis will help clarify your choices even further. Indeed, your business may require a network of BNPL facilitators with different orientations and expertise for various situations. Here are some of the mainstream players to consider:
Klarna is a Swedish fintech enterprise operating in nearly 20 countries:
- Default BNPL program—paying off in four installments, with one interest-free payment every two weeks.
- No predefined spending limit—decided case by case, even for repeat borrowers.
- The possibility of late fees and APR add-on for inconsistent payments.
Sezzle is a US fintech corporation headquartered in Minneapolis, funding over 47,000 BNPL brands.
- Default BNPL program—splits purchases into four equal payments over a six-week collection span.
- An automated system defines the maximum limit for each customer based on a proprietary formula. As a result, first-timer limits are relatively low, growing as usage increases.
- Zero hidden fees or interest rates in this company’s BNPL advances, but late payments can change future payments to include interest-loading.
PayPal offers Pay in 4, which, more or less, speaks for itself.
- Default BNPL program—four interest-free payments over two months with no credit score implications.
- Purchases range between $30 and $1,500.
- Late payments can change the no-interest-rate arrangement.
Affirm is a publicly-traded, San Francisco-based, fintech BNPL player that funded much of the Peloton demand surge during COVID-19. Many of the latter arrangements extended to 36 months.
- Default BNPL program—pay in four interest-free installments (once every two weeks or monthly).
- The company will fund up to $17,500 in consumer purchases with zero hidden fees or interest charges.
- Also, no late fees, but reporting to credit organizations may harm FICO scores.
Introducing BNPL to your audience
Younger generations, moving into markets as young adults and seasoned shoppers, are locking onto the BNPL trend like iron shards to a magnet. As their purchasing power accelerates, the funding system will gain momentum. It is already traveling at a prodigious pace. In 2023, BNPL pioneers have moved well beyond industry disruption to lead the charge. As CCC’s popularity wanes, expect the BNPL spearheads to take up the slack—fast and seamlessly.
Have you introduced the Buy Now, Pay Later option to your enterprise? Ask your customers if they’d like that option with a quick survey. SogoCX helps you take the first step (and many more steps) when it comes to understanding your customers and introducing them to new touchpoints and features!