No matter who you talk to, you’ll likely find they are unsure about the economy. Will inflation continue to come down? Will the markets continue to improve? What about employment trends? How will these events affect the economy at large and my company in particular? All of these questions impact how consumers spend and how companies respond to entice new or repeat purchases. One growing trend to address these concerns in 2024 and beyond is buy now, pay later or BNPL.
What Is Buy Now, Pay Later?
This new buying trend has been growing in popularity. In short, it’s a form of credit (or short-term loan) that allows customers to make a purchase and pay for it over time in interest-free installments. Because it’s done with “microdoses” of credit, it often feels more manageable to both the customer and the merchant. The timeframe is short and transparent, which helps everyone feel more in control.
One common buy now, pay later structure involves splitting a transaction into four equal installments, typically for purchases over $50. The first installment is paid at checkout. And the remaining installments occur over the next six weeks. This type of payment model is rapidly being adopted and is expected to grow significantly over the next couple of years. In fact, by 2026, the total market value is expected to grow to nearly $450 billion. And it’s already risen by over 800% since its launch in 2020.
Buy now, pay later has become especially attractive to younger demographics (e.g., Gen Z) due to its flexibility and accessibility. Gen Z currently makes up 55% of the BNPL space. It’s also appealing to those who don’t want to use traditional credit products.
Ecommerce companies are also embracing the BNPL model as customers have been found to be more likely to spend more compared to other payment options. In addition, the repayments tend to be both manageable and predictable, leading to greater control over finances.
However, there are also risks. For example, if customers miss a payment, fees or interest can rise dramatically. BNPL transactions also don’t typically hit your credit report. This could encourage people to continue to spend, even if they’re already overextended.
The growth of BNPL, combined with the potential risks, has gained the attention of the Consumer Financial Protection Bureau. So much so, future regulations are expected. Financial institutions and merchants alike may need to adapt to these regulations, with the goal being to lower the risk and assess the creditworthiness of people using the model. So, it’s important to work with experienced payment processors and fulfillment partners who can better help guide you through the coming changes.
Pros and Cons of Buy Now, Pay Later
There are several pros and cons to consider before adding this payment model to an ecommerce company. Let’s start with the benefits:
- Increased sales: Because customers can pay over time, buy now, pay later can increase sales or lead to people adding more items to their shopping carts. Customers are also more likely to purchase more expensive items or add more items if they can spread payments out.
- Attract younger customers: Offering a buy now, pay later option can help encourage younger customers (i.e., Millennials and Gen Z) to purchase. Because these younger groups are also setting trends in beauty and wellness, many companies are looking for ways to entice them to buy and then talk about their products on social media.
- Competitive advantage: If two companies offer similar types of products and one offers BNPL and the other doesn’t, this could be a deciding factor that causes customers to click the buy button.
- Improved conversions: When customers see they have the option of paying for a purchase in installments, they’re more likely to buy rather than abandon their carts, even if the price is higher than they planned to spend.
There are also cons of BNPL. Some of the biggest drawbacks include:
- Increased financial risks: While the BNPL provider often assumes most of the risks for customers who don’t pay, there are also potential financial risks for companies if default rates climb too high.
- Regulatory challenges: As this sector grows, it’s also getting more scrutiny. Ecommerce companies need to stay on top of the changing regulations to ensure they remain in compliance.
- Service disruptions: If you set up your company to depend on partners that offer BNPL, then if there are any changes in terms or if your payment company is found to be out of compliance, this could disrupt service and lead to delays.
- Customer service issues: With any payment type, billing errors or disputes occur. This is even more likely with new payment types. If there are questions or disputes, even if only with the payment provider, this can decrease consumer satisfaction, which could spill onto your company.
- Increased costs: There’s no such thing as a free lunch or a free loan. Even if they’re hidden, there are costs, such as transaction fees, that are paid to the payment provider. These costs could be higher than traditional methods. So, it’s important to understand those costs upfront and factor them into your pricing model.
Buy Now, Pay Later Takeaway
BNPL is a growing trend in ecommerce due, at least in part, to economic uncertainties. It does offer short-term benefits, such as allowing customers to purchase higher-priced products with payments over time. This, in turn, can help businesses maintain sales. On the downside, it can also increase customers’ debt burden, which could lead to financial instability. It’s a balancing act for customers and the companies that take advantage of the benefits of buy now, pay later.
Reach out to QuickBox to discuss different payment options and how you can better adapt to what your customers are looking for. We don’t make you fit into our “Box”—we build a “Box” to meet your (and your customers’) changing needs!