You’ve probably noticed that when you go to the check out section your payment options have expanded beyond just credit/debit cards and PayPal. Services like Klarna, Afterpay, and Affirm offer online shoppers micro installment loans or an instant financing option for their purchases. They allow shoppers to avoid paying upfront for purchases – like clothes, beauty products or technology – and instead divide the cost across fortnightly deductions.
Lately buy now pay later services became a great way to reach new customers, increase online store’s conversions, and rapidly grew into a retail trend. A survey showed that 40% of people are more likely to make a purchase if at the check out they would be offered instant financing options with a pretty small interest. The right payment solution can have a huge impact on sales and customer lifetime value. You can say it’s a win-win-win strategy because everyone – online store, customer and buy now pay later service – is benefiting from a purchase.
How It Works?
So how do these services work? There’s this simple but seductive psychology that BNPL services use to attract customers. Let’s say you’re shopping online and see an amazing 600$ dress, would you consider buying it? Probably not as it seems pretty expensive. But not until services like Afterpay or Klarna offer you to split the cost and pay later, convincing you to make a purchase. It makes it feel not as expensive, and with a few clicks, a $600 dress becomes four payments of just $150. Well, it’s not that bad, huh? I ain’t going to lie, I would totally make that purchase, and a bunch of other millennials would too, as 52% of millennials believe that it’s acceptable to go into debt while shopping during the holiday season.
Basically, BNPL services give shoppers the freedom to choose how to pay and when to pay. As an alternative to credit, these services increase sales and customer loyalty when added to your store’s online check out section, providing your customers with purchasing power and the flexibility that fits their lifestyle.
So if you want to add one of these financial options installments to your shop, here is what you need to know about buy now pay later services before that.
Top 5 Things You Need To Know About Buy Now Pay Later Services:
1. Younger Customers Prefer BNPL services
Buy now pay later services have rapidly grown in popularity during the last couple of years, and it’s younger customers that are actually driving this trend. Younger generations trust traditional financial institutions much less than older generations, but they still need convenient ways to split the cost and pay over time. According to ASIC, many BNPL users are young. 60% of the users are aged between 18-34 years, 2 in 5 users earn under $40,000 and 40% of these users are students or work part-time.
Buy now pay later options act as a modern version of layaway for them, giving young customers the freedom to pay over time without having a credit card. Each month more and more big brands offer these payment methods, meaning they’re becoming something that customers expect everywhere.
2. Buy Now Pay Later Services Are a Great Way For Reaching New Customers
If you want to reach out to more new customers, it is no longer needed to offer only credit card options. Of course, credit cards are a great purchasing tool, but only for those customers who have them. However, the number of credit cardholders in your target audience might be fewer than you think, as today only 1 in 3 millennials own a credit, according to a study.
Payment behaviors are changing dramatically for young customers. They expect to be able to pay with a digital wallet, an installment financing plan, or an alternative payment platform. And by not providing these options, you are leaving a lot of potential sales in the shopping cart.
3. Buy Now Pay Later Services Increase Sales
30% of online shoppers that have used buy now pay later services said they probably wouldn’t have made the purchase at all if they weren’t offered a financing option. As you can see, buy now pay later services address your customers’ exact pain points while they are at the check out. And offering a financial option helps you drive up your online store’s sales and order values.
Recently PayPal found that average order values for merchants increased by 15% after they started to offer financing options to their customers, and average order value increased by more than 30% with buy now pay later services.
4. Buy Now Pay Later Services Increase Conversions
Did you know that more than 2 out of 3 of all online shopping carts are abandoned? The second most commonly mentioned reason is that the cart cost is too expensive. After adding a few items to the cart and seeing the total tallied up, customers get sticker shock. Offering a financial option that lets shoppers check out now and pay over time dramatically reduces cart abandonment rates.
For online stores that have added Klarna, Afterpay, Affirm or any other BNPL service, checkout conversions have increased by 38.7% for the first time visitors. Reducing sticker shock of a one-time purchase reduces cart abandonment, which means more sales and conversions.
5. Buy Now Pay Later Services Are Booming, But The Industry Is Still Under-Regulated.
Because companies like Afterpay, Klarna, Quadpay or Affirm don’t charge interest on purchases – just late fees if users fail to pay on time – they aren’t required to check the customers the way traditional credit companies are or follow the same level of government scrutiny. As Julia Davis from FRLC said: “It’s like the wild west”. And nobody is regulating it.
Basically, BNPL services don’t need to check that a customer can actually afford to pay back these debts before they give the credit. They’re not considered as credit providers, so they don’t need a credit license. And they are encouraging customers to spend more money which they don’t have. Even if it’s not considered credit under the law, it’s absolutely a debt and needs to be regulated.
Buy now pay later services are a great tool for reaching new customers and increasing your online sales and conversions, especially if your product’s target audience is younger generations. But as you consider which payment methods to use, don’t forget to think of the customer first. In the customer’s mind, the whole payment process is an extension of your store. And a bad payment experience – whether it involves hidden fees or high-interest rates – leads to a negative shopping experience at your online store.
But still, I would suggest adding these financing options to your store, especially during these times. As I said before, it’s a win-win-win strategy, and if everything goes well, shopping brings value to everyone.