Why retailers accept purchases now and pay financial services later

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

Over the past few years, early bird shoppers may have turned to reserve plans to book holiday gifts and pay for their purchases over time. However, many retailers, including the country’s largest Wal-Mart, have abolished or reduced these programs. One of the reasons is that shoppers 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 for retailers to manage, and research shows that these options lead to larger baskets and increased customer loyalty. RBC Capital Markets estimates that the BNPL option will increase retail conversion rates from 20% to 30% and increase average ticket size from 30% to 50%.

Addition of incremental sales

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

According to Kearney’s Associate Partner for Financial Services Operations, Hemal Nagarches, installments provide consumers with choice and convenience when it comes to budget management and purchasing. He also said the option would increase trust between retailers and consumers, leading to “increased sales, increased average purchase size, and increased purchase frequency.”

Buy now and pay later payment plans from companies such as Affirm, Australia-based Afterpay, and Sweden’s Klarna are especially appealing to young shoppers such as Gen Z and Millennial consumers. is. Each plan varies from the number of payments to specific terms, but an important similarity is the promise of a handful of even payments in a relatively short period of time, with no hidden charges. In many cases, the plan is interest-free.

Installments are popular with consumers who do not have credit or do not 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 shoppers who don’t have the money to cover the total purchase, but will pay a few salaries in the future.

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

For example, consider the apparel retailer Rue21. Its main demographic is female shoppers aged 18-25, who often do not use credit cards. Increasing the average order volume is an important priority as the website has a large number of low-priced items and the traffic in the mall is declining.

When the pandemic closed the store, Rue21 had to figure out how to sell it to shoppers online without credit. According to a case study published by Klarna, Rue21 has added Klarna as an in-store and online payment option, so its average order volume is 73% higher than other payment methods. Rue21 shoppers who do business with Klarna buy 6% more often and have the highest sales per customer. As of May, Klarna purchases accounted for more than a quarter of rue21’s e-commerce sales.

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

Kristoffer Tripplaar | Sipa via Associated Press Image

Affirm boasts that merchant clients are reporting 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 has proven to be very important for Peloton’s expensive training equipment and services. FTP artners, an investment bank focused on the fintech sector, estimated that 30% of Affirm’s revenue in the first quarter of 2021 came from sales on Peloton’s website.

Klarna’s merchant base reports that when shoppers pay more than four times, the average order value increases by 45%. Shoppers can also pay full interest-free for 30 days, or for large purchases, pay monthly for 6 to 36 months and raise an annual rate of 0% to 29.9%.

New customer

Attracting customers who may not have been upset in other ways by retailers is another advantage of offering the option to buy now and pay later.

Earlier this year, Macy’s CEO Jeff Gennette told investors that the partnership with Clarna was 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 stores, “he said. Our goal is to turn all these new customers into Macy’s loyal customers returning for future purchases. “

Approximately 93% of the total afterpay commodity value in the most recent fiscal year comes from installment payment service repeaters, with the longest-serving consumers trading more than 30 times a year.

Higher conversion

By paying in installments, retailers can [consumer’s] Chris Bentley, vice president of SS & A’s Global Consultants Group, said he “wants to sell” and “eliminates impediments to solvency.” Attractive through BNPL and ultimately attractive enough to drive conversions. This is the main goal of all digital commerce sites. “

An analysis by Similarweb of the top 100 US fashion and retail websites compared 50 merchants who offer the option to buy now and pay later at checkout, and 50 merchants who do not. On average, sites with the BNPL option had a conversion rate of 6%, while sites without it had a conversion rate of 4%.

Afterpay said it will increase retailers’ conversion rates and incremental sales by 20% to 30% over other payment options.

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

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

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

Growth opportunities

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

Worldpay estimates that the use of this option will grow at a compound interest rate of 28% per year and could reach $ 166 billion by 2023. At that pace, it will account for about 5% of e-commerce in the world outside of China.

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

John Harmon, senior analyst at Coresight, recognizes the opportunity for retailers, but does not consider it a panacea.

“The BNPL isn’t considered a magical solution because it’s another type of credit, despite its surge in acceptance,” Harmon said.

Why retailers accept purchases now and pay financial services later

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