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BNPL: Is It Worth the Hype?

Currently one of the fastest growing payment methods globally, “Buy Now, Pay Later” (BNPL) is gaining momentum among younger shoppers as well as their older cohorts, with particularly strong growth in segments such as fashion. As the first in a new series of blog posts on the topic, we’ll shine a light on the growing BNPL trend to help merchants assess its value to their business (which is expected to exceed $260 billion by 2025!) and how they can get the best out of their provider.

To attract new customers, boost conversion rates and uplift lifetime value, merchants must offer consumers’ preferred payment methods, and that is certainly true for “instant credit” payments such as BNPL. Let’s dig into some of the fundamentals of this growing payment trend.

What is BNPL?

BNPL allows consumers to pay for their purchases in installments, or over time, often with no interest or fees. Also known as “point-of-sale lending,” this payment method lets customers pay in weekly, bi-monthly or monthly payments (often depending on the provider). Some BNPL providers also allow customers to pay in full after they’ve received the goods – effectively a “try before you buy” option.

How popular is BNPL today and why is its popularity growing?

BNPL services are growing at a rate of 39 percent a year, with its market share set to double by 2023. By then, 3 percent of global ecommerce spend will be through BNPL services. What’s more, one study showed 85 percent of consumers who have used BNPL services plan to continue doing so in the future. Although many BNPL providers are new to the market, some are already profitable, which illustrates the business model is probably here to stay.

At a regional level, BNPL is already very popular in Europe, North America, and Australia, where transaction value has grown by 292 percent between 2018 and 2020. By 2025 however, it is predicted that markets such as China and India will overtake western players from a transaction volume perspective.

BNPL is a popular online form of payment, but its usage in-store is also growing, and is set to see a 7 percent annual increase at the POS from 2020 to 2025.

BNPL offers a more flexible, less costly way to spread out a payment, enabling consumers to purchase items that may otherwise not have been easy to fund. The payments experience for BNPL is digitized, with customers registering, undergoing an initial “soft credit check” from the BNPL provider, and obtaining approval in a matter of seconds. Customers can usually set their payment schedules at checkout – supporting that all-important fast, seamless experience that digital natives expect.

Of course, it is important for shoppers to be aware of the risk associated with any form of credit-based payment, and not making repayments on time. Missed payments can result in significant fees.

How can merchants benefit by offering BNPL?

It’s no surprise that offering customers’ preferred payment methods can create sales uplift. But when it comes to BNPL, there is an even stronger, more compelling set of statistics.

A survey by AfterPay showed that 42 percent of Gen Z and 69 percent of millennial shoppers are more likely to purchase items if a BNPL service is offered. While this may seem biased, coming from a BNPL provider, it’s backed up by other recent research too. For example, the PYMNTS BNPL tracker (December 2020) shows that 48 percent of the consumers they surveyed wouldn’t buy from a merchant that didn’t offer BNPL payment options.

These figures don’t tell the whole story though. Multiple surveys have shown that customers who use BNPL also tend to spend more. A survey from Mastercard illustrates that the average ticket price increases with BNPL; 69 percent of shoppers say they would spend more, and 59 percent said they would increase their spend by at least 10 percent.

Other surveys suggest the revenue uplift from BNPL could be even higher, with a report from Cardify showing nearly half of respondents spend anywhere from 10 percent to over 40 percent more when they use BNPL versus a credit card.

What’s the catch for merchants?

Consumers not having to pay “in full” up front doesn’t mean merchants have to wait for their money. BNPL providers are set up to make sure merchants get their funds right away and the provider takes on the risk in securing the repayments from the customer.

The other upside is that merchants don’t take on the fraud risk for BNPL payments. Liability for fraud, chargebacks, or even when a customer defaults on a repayment sits squarely with the BNPL provider.

There is, of course, a fee for the service, and merchants must be clear on these fees when looking at which BNPL provider to work with. Merchants can pay between 2 and 8 percent per transaction, depending on the provider, which is typically higher than credit card fees. Some providers instead apply a flat fee of 30 cents per transaction.

Honing in on the hype

There are positive (and potentially profitable) reasons for merchants to offer BNPL options to consumers.

Having the flexibility to offer the BNPL brands (Afterpay, Klarna, Affirm, etc.) that are right for the market is important. So, to help, we will be taking a closer look at some of the most important ones in the next post in this series. First up will be Swedish provider, Klarna, which has grown 46 percent in 2020, to reach USD 53 billion in gross merchandise volume.

ACI Secure eCommerce offers the coverage and ACI experts have the market knowledge to help you get set up with the right mix of BNPL providers for your market. Contact us today to get started.

Senior Product Manager

Marc-Christian Maibach is a Senior Product Manager with responsibility for the ACI Secure eCommerce solution. His role is to define and develop ACI‘s eCommerce tools, platforms and value-added products to create value for merchant and PSP customers.