What Does the Buy Now Pay Later Trend Mean for Retail Payments?

As readers of this article likely know, customers can use the buy now pay later (BNPL) option to make purchases — both in-person and online — without having to pay the entire price of the goods at the time of purchase. Like the layaway plans from the past, BNPL allows customers to spread out their payments if they don't have a credit card or the money to pay for their preferred item(s) at the time of purchase.

Although BNPL was already well-known abroad, COVID-19 gave it a boost in the U.S. since it provided cash-strapped customers with the option to make partial payments for goods they had purchased online or in-store. Particularly among Gen Z and millennials who might not have credit cards, BNPL has surged in popularity. It's also more common with expensive purchases that are often "financed" by making payments on conventional credit cards and carrying the amount.

According to eMarketer, the number of U.S. BNPL users is projected to soar from 1.6 million in 2018 to 59.3 million in 2022, driven by innovations in credit access and purchase flexibility. And according to Mercator, U.S. BNPL transaction volume is projected to surpass the $100 billion mark annually by 2024, up from $55 billion in 2021.

The rapid escalation in BNPL use has driven a surge in the market overall, including Square acquiring Afterpay and PayPal acquiring Venmo and Paidy. Furthermore, BNPL options like Klarna, Affirm and others are quickly growing as well.

What does this all mean for retailers and consumers?

Retailer Appeal

Retailers are obviously aware of the consumer allure and advantages of BNPL. Target joined the BNPL bandwagon ahead of the last holiday shopping season, following companies like Amazon.com and Walmart in providing this kind of payment option for customers. To offer BNPL, Target is collaborating with Affirm and Sezzle.

In a 2021 announcement, Afterpay said that it had expanded its retail partners to include Le Creuset Signature Boutiques and Outlet Stores, J.Crew, Madewell, American Eagle, Aerie, Tillys, Morphe, Alo Yoga, and Nordstrom and Nordstrom Rack. This allows customers of these retailers to pay for their purchases over four interest-free installments. Similar collaborations exist between Simon Property Group and Klarna.

Beyond aiming to meet consumer interest, one of the main advantages for merchants is the simplicity of BNPL payments. Additionally, studies have shown that BNPL options increase basket sizes and customer loyalty. According to RBC Capital Markets, a BNPL option raises average ticket size by between 30 percent to 50 percent and retail conversion rates by 20 percent to 30 percent.

Consumer Risks

Concerns have been raised that BNPL choices are encouraging customers to live beyond their means because retailers frequently see an increase in their sales volumes as a result of using BNPL. Consumers find BNPL appealing, but there are certain financial dangers involved. Since it's a loan, only timely payments will result in interest-free installments. If customers skip a payment or don't make a payment on time, they will be charged late fees. And these will eventually have an effect on their credit. In reality, a study by Credit Karma revealed that 34 percent of American consumers who utilized BNPL services had missed one or more payments, and 72 percent of them had seen a drop in their credit score.

Additionally, unlike with credit card payments, shoppers cannot take advantage of benefits like cash-back or reward points.

Despite the dangers, BNPL has a history of successfully advancing the interests of all parties. Beginning with the early mail order companies, BNPL has been effectively operating for decades without any negative effects on consumers in Germany, where Computop's international headquarters is located. It only demands prudent usage on the part of the consumer, like all new payment methods and even credit cards.

There’s no doubt that BNPL is becoming increasingly more enticing to consumers, making it harder and harder to dismiss this kind of installment payment option as a fad. In light of the expansion of BNPL options and consumer appeal, not only in the U.S. but also in other countries like the U.K., it's likely that more retailers will begin offering this payment option — or risk losing business to those that do.

Jed Danbury is vice president at Computop, a global payment service provider. He has been working in the banking and merchant processing industry for more than 15 years.