Lilah Raynor, CEO & Founder of Logica Research, helping organizations use research to engage customers & improve people’s financial lives.
The past year has shaken up the world of personal finance, with one of the greatest impacts showing up in the payments space. As Americans navigate the Covid-19 world and the continuing social and political unrest, their wallets have definitely been affected in one way or another. We have found that Americans have been open to new ways to pay for goods and services during this time. One area examined in my company’s latest “Future of Money” study was payment installment plans, like Buy Now Pay Later (BNPL). Our research found a significant increase in the use of BNPL in the younger generations, with 17% of Gen Z and 21% of millennials using it more.
Millennials’ active shopping lives have tended to make them early adopters of ways to pay. In a recent article from PYMNTS, it has been shown that they are using BNPL programs, especially since the onset of the pandemic. Our research has also shown that the older members of Gen Z who are now in their late teens and early twenties — and coming into their buying power — are rapidly adopting the BNPL options available to them. It looks like the booming installment and BNPL programs are here to stay.
Why are consumers using BNPL?
In particular, the BNPL option has been transforming online shopping with retailers offering this solution to allow consumers to pay in installments instead of having to pay for the entirety of their purchase upon checkout. In general, these services do not charge the consumer any fees or interest if all payments are made on time.
There are a number of apps offering the BNPL service, including PayPal Credit, Affirm, Afterpay and Klarna. Among the many options in the marketplace, PayPal Credit garners the most awareness, with 78% of Americans citing that they have heard of, or have used, this service, according to our survey. Awareness of other apps is generally below 20% but is rising quickly. All of these services have been specifically targeting the younger generations. In a recent article from ypluse, the growing payment app Klarna is looking to further engage Gen Z and millennials by creatively partnering with retailers that cater to this demographic. The company even aired a Super Bowl commercial (registration required) featuring Maya Rudolph this year. Many online retailers are also offering special discounts or deals for using these services to gain share among consumers.
MORE FOR YOU
In our study, Americans told us in interviews that they opted for a BNPL option at checkout because they encountered a tempting deal or discount. One study participant stated, “I went to go pay through PayPal and they sent me, ‘If you want to use PayPal Credit, we’ll give you $20 off this purchase.’ That’s all I needed to hear. I ended up just paying the whole thing off anyway! I’m just looking for a deal.” Creative engagements and promotional messaging like this will continue to grow in the online shopping environment as the apps try to expand their footprint and share.
What is the monetization structure for BNPL?
Typically, these installment payment services make their money from the late fees they charge consumers who miss payments. The interest rates could be as high as 30% for those failing to meet the agreed-upon repayment terms. Merchants also pay fees on customer purchases when they contract with an installment payment company like those mentioned here.
Should your brand offer BNPL options?
If you are struggling to understand whether you should offer BNPL at check out, this is understandable. There has been a proliferation in ways that consumers can pay in recent years, and especially in this past year. While this can be overwhelming for both consumers and merchants, the proliferation of payment options is also driving consumer expectations.
In order for you as a retailer to decide what is best for your business, I recommend gaining a deep understanding of your target market and their purchase decision journey. For example, if your market is from the younger generations discussed here or your shoppers express the need to manage cashflow, having BNPL can be a helpful option for customers — and help drive sales. Understand who your customers are, what they are buying from you and why, and what their financial situations are in order to provide the best check-out experience and payment options.
The adoption trend of these BNPL technologies has definitely been accelerated during Covid-19, and it doesn’t show any sign of slowing down. It’s a bandwagon that more traditional payment institutions, as well as newcomers, are scrambling to get on, and those BNPL companies that are already established are gaining momentum among all generations, with the youngest cohorts leading the way.