Supply chains are snarled and manufacturing is constrained. For weeks, headlines have been telegraphing a clear message to shoppers: This holiday season shop early.
In the past, layaway plans may have been used to secure holiday gifts for early-bird shoppers and to pay them off over time. But many retailers — including the nation’s largest, Walmart — have done away with or scaled back these programs. Shoppers have many options to spread their payments.
Buy now, Pay Later plans are a popular choice for customers. They are also a favorite of retailers. Retailers love point-of sale loans because they are simple to administer. Research also shows that these options can lead to larger baskets and higher customer loyalty. RBC Capital Markets has estimated that a BNPL option will increase the retail conversion rate by 20-30%, while increasing ticket sizes between 30 and 50 percent.
“It’s all about incrementality,” said Russell Isaacson, director of retail and automotive lending at Ally Lending, “getting that incremental sale or incremental consumer.”
Hemal Nagarsheth (associate partner at Kearney’s Financial Services Practice), said that installment payments offer consumers convenience and options when it comes down to purchasing and managing their budgets. The option increases the trust between consumers and retailers, he said, resulting in “incremental sales”, higher average purchases, and increased purchase frequency.
Buy now pay later payment plans, offered by companies like Affirm, Australia-based Afterpay and Sweden’s Klarna, are particularly attractive to younger shoppers, like the much-desired Gen Z and millennial consumer. While each plan has differences — from the number of payments to the specific terms — the key similarity is the promise of a handful of equal payments spread over a relatively short period of time, with no hidden fees. The plans often come with no interest.
Consumers who do not have credit or do not wish to use a credit card for any reason are likely to prefer installment payments. Hans Zandhuis from Ally Lending, President, says that the option makes sense to shoppers with limited funds but who will have sufficient income over time to make the purchase.
Zandhuis said that an average buy now-pay later transaction is $200. He stated that often the retail store’s checkout value would be around $100, had they not offered the possibility to pay in the future. The same consumer could spend anywhere from $175 to $200 and only make four monthly payments, which would be $50. Payroll cycles are synchronized with the payments.
Rue21 is an example. Rue21 is an apparel retailer that targets 18-25-year-old women who don’t often use credit cards. It has a lot of low-priced products on its website and is experiencing waning mall traffic so increasing the average order volume should be a priority.
Rue21 was forced to find a way to make its customers pay online when the pandemic decimated stores. Since Rue21 added Klarna as a payment option in-store and online, its average order volume is 73% greater than other payment methods, according to a case study Klarna published. Klarna customers who shop at Rue21 turn out the most sales, with an average of 6% more purchases. Klarna’s purchases accounted for over a quarter rue21’s total e-commerce sales, as of May.
An image of the logo outside a rue21 location in Chambersburg (PA) on January 25, 2019.
Sipa via AP Images Affirm boasts that its merchant clients report a 85% increase in average order value when consumers opt to use its BNPL plan over other payment methods.| Sipa via AP Images
Affirm boasts that its merchant clients report a 85% increase in average order value when consumers opt to use its BNPL plan over other payment methods. Affirm approves installment payments for purchase totals as high as $17,500, which has proven to be very important for Peloton’s expensive workout equipment and services. FT Partners is an investment bank that focuses on fintech. It estimates 30% of Affirm’s first quarter 2021 revenue was derived from Peloton’s website sales.
Klarna’s merchant database reports an average 45% increase of order value for shoppers who make more than 4 payments. The option to pay full payment in 30 days is available. For larger orders, customers can opt for financing. Monthly payments range from 6 to 36 and the annual percentage rate is between 0% – 29.9%.
Attracting a customer a retailer might not have swayed otherwise is another benefit of offering a buy now, pay later options.
Earlier this year, Macy’s CEO Jeff Gennette told investors its partnership with Klarna was helping it to attract new customers.
“We launched Klarna on the Macy’s website in October  and we’ve since scaled it across Macy’s, Bloomingdale’s and Bluemercury, both online and in stores,” he said. Klarna has helped us to increase our spend per visit, and attract younger customers. In fact, half of Klarna’s customers are under 40. All of these new customers will be converted to Macy’s loyal clients, which in turn will bring back future orders.
Afterpay received 93% of its gross merchandise value from customers who used the service again in the last fiscal year. The longest-serving customer makes 30 transactions per year.
Installment payments allow the retailer to “convert a [consumer’s] wish into a sale” according to Chris Ventry, vice president at global consultant group SS&A company. Ventry stated that it eliminates the “inability-to-pay” roadblock. Ventry stated that the possibility for extended interest-free payments through BNPL to debit card users is appealing, eventually enough to increase conversion.
Similarweb’s analysis of top-100 U.S. fashion sites compared fifty merchants offering a “buy now, pay later” option at checkout to 50. Websites with a BNPL option had an average conversion rate 6% compared to 4% when they did not.
Afterpay claims that it improves a retailer’s conversion rate, and increases incremental sales by 20%-30% over other payment options.
Retailers pay less to fintech companies because of the higher conversion and incremental revenue. Zandhuis stated that while the transaction fee paid to the BNPL company is 2% more than the traditional transaction fees, the math proves it. It is more than what it costs.
Klarna and Afterpay charge merchants between 3% and 5% for transaction fees. Affirm refused to reveal its transaction fees.
They also offer advantages to traditional layaway programs, where customers can pay monthly installments while retailers keep their purchased goods on the premises. To service their online orders, retailers increasingly use stores to serve as mini-fulfillment centres. This model places store space at a premium.
Buy now, pay later is the fastest growing e-commerce payment method globally, with the growth of digital wallets second, according to FIS Worldpay. Global e-commerce was 2.6% in 2019 thanks to the $60 billion BNPL Market, excluding China.
Worldpay predicts that this option would grow at an annual compound growth rate 28% and reach $166 million by 2023. This would mean that it would represent 5% of all global e-commerce other than China.
FIS WorldPay estimates that BNPL accounts for less then 2% of all North American sales.
John Harmon, Coresight’s senior analyst, acknowledges that there is an opportunity for retailers but doesn’t see it as the panacea.
Harmon explained that BNPL was not a solution to all problems, despite its popularity.