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What is Buy Now Pay Later for Ecommerce?

Over the last few years, buy now pay later, or ‘BNPL’, has exploded onto the ecommerce scene and its impact has expanded since. BNPL services allow customers to buy goods in instalments or to pay the fee at a later date, with no additional charges and usually no interest rate.

illustration: Storyset

Buy Now Pay Later is not an entirely new idea. Some would say credit cards offer a similar function: Allowing you to buy things directly, and then pay your credit card provider at a later date. BNPL usually differs from this, in that no interest is usually charged if customers pay within one of the standard methods (eg, paying in 3 monthly instalments). BNPL is also similar to one of the standard German ecommerce payment methods – ‘Kauf Auf Rechnung’ – which means ‘Purchase on Invoice’. Though ‘Kauf Auf Rechnung’ has never become popular outside German-speaking countries, BNPL providers such as Klarna have had great success, in particular in packaging up what they do and offering it to younger customers, firstly via fashion retail websites.

The major players in BNPL differ by region, but in general Klarna, Afterpay (known as Clearpay in the UK), Affirm, LayBuy and Paypal Credit are well known across several regions.

Klarna has become the most well known ‘pure’ BNPL provider. (PayPal is much more well known, but as a general payment provider). As an example of their scale, Klarna:

  • Works with more than 200,000 merchants, in 17 countries
  • Manages more than one million transactions every day
  • Has sold to more than 85 million customers

Prominent backers of Klarna include Sequoia Capital (known for their investments in Apple, Airbnb, Stripe, Square, Instagram), and Visa, the world’s largest payment network.

The terms offered by different providers and in different regions vary, but overall Buy Now Pay Later offers customers the option to pay across a period of time, ranging from weeks to years, depending on the provider. When using BNPL, customers will receive their goods before payment is completed, just as they would if they paid in full up front.

Though Buy Now Pay Later providers have sprung to prominence only in the last few years, the amount of use they receive is very high: management consultancy Kearney has suggested that 67% of UK millennials have used BNPL options, showing its growing prominence within ecommerce and the need for it to be considered by retailers.

There are various pros and cons to consider when opting to add Buy Now Pay Later to any website.

Advantages of Ecommerce BNPL

In general, retailers choose to add BNPL to their websites, or opt to take them in store, for 3 reasons:

  1. Sell to a group of customers who now buy using BNPL by habit.
  2. Offer the ability to purchase for customers at times when they don’t have the full amount available (for example ahead of payday).
  3. Match the customer experience offered by competitors, or go one better than competitors.

Some Buy Now Pay Later companies offer to help market the brands they work with – for example by sending vouchers to potential customers via email – but in general the main decision making is around increasing the likelihood of purchase from visitors already coming to their sites, rather than attracting extra visitors.

As mentioned, BNPL is already making an impact upon shoppers and retailers and it is clear that BNPL is set to become an even larger element in commerce both online and in store. For consumers, BNPL offers fast sign up in comparison to credit cards, and with little or no interest fees, this method of payment is very appealing to many. This appeal is, in turn, beneficial to ecommerce businesses, as BNPL has proven to attract more custom, larger purchases and reduced shopping cart abandonment, for a number of reasons. 

First, BNPL checkout options may attract customers who were hesitant to buy things which they saw as out of their budget. Offering a way to make this price seem more manageable may bring in purchases from customers who may previously have left without completing a purchase. Similarly, BNPL allows people to make purchases when traditionally their funds may have been lower, for example just before payday or at seasonal times such as Christmas. These reasons may contribute to BNPL reducing cart abandonment after introducing BNPL options, as BNPL eases the checkout purchase by offering payments at more manageable amounts. 

Lead provider Klarna states impressive statistics which highlight the impact that BNPL options have made for various companies. Since providing the option to checkout with Klarna, Schuh saw a 40% increase in conversions on mobile and a 25% increase on desktop purchases. Klarna also cites a 15% increase in average order value, and a 20% higher annual customer purchase frequency. These statistics suggest that BNPL is positively impacting businesses, bringing in higher purchase values and also adding incentives for customers to return. 

From uptake alone, it is clear that some consumers want to use BNPL options, and staying up to date with the methods that your customers want to use can be incredibly valuable. Adding BNPL payment methods has proven to bring in revenue for many companies, so adding these providers to your site could increase revenue without using other tactics such as sales and discounts. There is also no risk for the retailer, as the BNPL provider deals with defaults in every case. 

In general, BNPL companies focus most keenly on the following verticals:

  • Fashion
  • Beauty
  • Luxury
  • Home

It may be that if you are selling within one of the above niches, your competitors offer BNPL options as standard, and that a certain number of customers may be unwilling to switch to you unless you match that service.

BNPL for Retailers: Four Factors to Consider:

Alongside the potential benefits of adding ‘Buy Now Pay Later’, there are various possible downsides to consider.

One: Fees.

In order to offer BNPL options, merchants must pay the provider a fixed fee for every transaction, as well as a (roughly) 2-6% commission of transaction value from sales made using the provider.

While some sales through this method may be ‘incremental’ (on top of those you would expect without it), some customers may switch from their normal purchasing methods across to BNPL, meaning in some cases retailers will in effect be giving away fees to BNPL companies for sales they would have made without any

Two: Returns.

Also, providing BNPL options may result in increased returns, as many people may buy more than they wish to keep, with the intention of seeing what they like and returning the rest. With this in mind, it is important to ensure you have effective methods in place to identify and reduce returns fraud, as companies may be more susceptible to this with the introduction of BNPL options. 

Three: Education.

It is important to also consider that some of your customers may not be familiar with BNPL or how it works, so it may be a good idea to introduce and educate visitors to the website how this option works, should they wish to use it. 

Four: Profitability.

Finally, when selling products with small profit margins, BNPL may not be beneficial to the business. Once you have accounted for the fixed fees and commissions on sales, BNPL may reduce profit to the point that using this option negatively impacts the company. It is important to weigh this up when considering implementing BNPL within your ecommerce site.

How To Integrate Ecommerce BNPL Options:

To offer BNPL options at checkout for your own business, most providers ask you to get in touch via their website. Here, you will be asked to fill out forms outlining countries you operate in, annual sales and general contact information. It is simple and fast to enquire about BNPL options, meaning that you can look at the advantages and disadvantages of various providers before committing to one, or multiple, providers.

Final Thoughts:

As a method of payment that has only been around for a few years, BNPL is impacting ecommerce hugely. Some of the biggest online retailers provide BNPL options at checkout, including ASOS, Wayfair, JD Sports and Pretty Little Thing. Accordingly, BNPL cannot and should not be ignored. It may not be the right choice for every ecommerce store, though keeping up to date with the methods customers wish to pay by is very important in satisfying customer needs and generating more sales. It is likely that BNPL will only increase in prominence in relation to ecommerce, so keeping an eye on this could be beneficial to many retailers. 

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Posts written by author Ecommerce Guide will be written by multiple authors.

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