Buy Now, Pay Later (BNPL) Market Overview: Trends and Technologies
Interested in adding a buy now, pay later (BNPL) system to your ecommerce business? In this article, we talk about the buy now, pay later model main features are, how to implement it, and what benefits it can bring to your business.
Buy now, pay later market overview
A recent report from IBISWorld predicts the Buy Now Pay Later (BNPL) industry will continue to grow 9.8% annually over the next five years to $ 1.1 billion.
During the Covid-19 “BNPL service providers are likely to benefit from consumers using industry services for essential items,” IBISWorld senior industry analyst, Yin Yeoh said. IBISWorld notes that some Australians have used BNPL to buy essential items like clothing and groceries.
Afterpay’s current market capitalization is $ 17.7 billion after the share price jumped from $ 8.90 on March 23 to over $ 70 per share in July, pushing Afterpay out of the top twenty ASXs. Yin Yeoh stated that as bank accounts run out, more consumers are likely to turn to BNPL options. The ability to shop now and pay becomes more and more attractive to consumers in financial distress.
IBISWorld predicts the BNPL industry will grow 9.1% in 2020-2021, bringing it to $ 741.5 million, as online shopping revenue grows 6.4% this year to $ 31.2 billion. BNPL platforms such as Afterpay, Klarna, and Zip Pay are expected to receive some of this growth, IBISWorld reports.
Australians are increasingly moving away from credit cards: data from the Reserve Bank of Australia show that the number of used credit cards has decreased by 6.6% in the last financial year. In May Australians ditched more than 100,000 credit cards, bringing the number of valid cards back to levels not seen since 2009. Given that interest-free services like AfterPay, and ZipPay are more popular among the younger generation, and free debit cards that regularly offer perks like $0 international transaction fees, the future of credit cards looks grim. Based on the state of the buy now, pay later market, we can say that the fintech app development will be quite popular in the upcoming years.
Benefits of buy now, pay later
Now let’s find out what the benefits are for retailers of BNPL services.
- Up-front and in-full payments. With BNPL services, retailers get paid up front and in full. Payment providers shoulder the credit risks, so you don’t have to worry about chasing after late payments.
- Higher conversion rates. Shoppers tend to buy products if they can afford to take them home right away. Industry data shows that merchants can increase their conversion rates by 20% to 30% with a BNPL service.
- Higher average transaction value. When customers are provided with a buy now, pay later option, they’re more likely to buy more products and spend more money than usual.
- Larger customer base. A buy now, pay later service can attract customers who wouldn’t have visited your store otherwise. Today, there are millions of consumers who use BNPL services, and many of them are looking specifically for stores that offer it.
- Repeat purchases. Customers tend to make repeat purchases more often with BNPL. Afterpay BNPL shoppers make purchases more than 20 times per year on average.
Buy Now, Pay Later challenges
Many BNPL offers are suitable for customers with the highest credit scores. Since only Prime Lending is offered, many buyers are effectively “locked out” of the BNPL trend. For sellers, this means that a large proportion of potential customers have a bad payment experience and end up giving up on the sale. By only offering one BNPL supplier or by offering only Prime BNPL suppliers, merchants cannot win business from less qualified consumers.
The BNPL loan rejection rate is surprisingly high. In some cases, up to 70 percent, depending on the demographics and vertical. Merchants should offer the preferred payment methods that their customers want and expect to find when they checkout. But if the BNPL bounce rate is that high, many buyers don’t have the best payment experience. As already noted, the main reason for this slow adoption is that today most BNPL providers only use first class lending.
BNPL can be expensive for merchants, 3-7% on top of the usual credit card processing fees. There is no doubt that BNPL is now a must for merchants who want to offer their customers the best payment option available, but it is not a cheap solution. It is true that sellers are paid up front and the BNPL provider takes care of collecting the money afterwards, but the seller’s costs are an important consideration, especially if margin is tight.
How to implement BNPL in your store
Here are a few tips on how to implement a buy now, pay later service in your store. But first, you need to find a BNPL service provider.
Here are some key factors you should consider when choosing a BNPL partner:
- Point of sale integration. To ensure a smooth checkout process, use a provider that integrates with your existing POS system. This way you’ll be able to reduce the need for manual work and double entry.
- Fees. It’s typical for buy now, pay later companies to charge a fee for processing payments. Usually, it’s in the form of a percentage of the purchase price plus a transaction fee. Research the fees of different providers to choose the most suitable solution.
- User base. It’s better to choose a trusted payment provider that has a strong user base. A well-known provider will showcase you to more people and attract customers to your store.
Basic components of buy now, pay later platforms
Buy now, pay later services usually have the same core components:
- Loan terms. These depend on the provider and the retailer. For inexpensive purchases, loan terms can be a few weeks to six months. For big purchases, customers can pay for two or more years.
- Purchasing power. The purchasing power usually depends on the provider. BNPL providers offer loans of up to $30,000.
- Repayment frequency. Consumers pay back credit in weekly or monthly installments, while merchants are usually paid back in up front and in full.
- Convenience. Everything is done quickly and easily. Customers can apply for loans and get approved in minutes at the point of sale or online.
- Paperless. Everything from the application process to loan management is done online. With buy now, pay later, customers don’t have to physically print or sign anything.
How to encourage customers to use buy now, pay later
So what should you do after implementing buy now, pay later functionality? You should start spreading the word to encourage your customers to use this payment option.
Here are a few tips on how to attract customers to your buy now, pay later service.
Attract your customers’ attention with an official announcement of your new payment technology. For example, if you have a customer email list, you can send all your customers a message telling them about buy now, pay later and encouraging them to use it in-store.
Another good idea would be to include product mentions to give customers an idea of what they could purchase using BNPL.
Let customers know about your buy now, pay later services by placing informational banners on your site and icons on product pictures.
Get listed in your BNPL provider’s directory
Most buy now, pay later providers have directories listing the retailers that offer their services. This puts your business in front of potential new customers who are looking to take advantage of your BNPL offerings.
Top 3 buy now, pay later providers
One of the most popular buy now, pay later providers is the Australian Afterpay. To use Afterpay, customers simply choose it as their payment method when making an online purchase. They then have eight weeks to pay the amount back in four installments, with no fees if all payments are made on time.
How does Afterpay work?
Customers can start using Afterpay by signing up and adding an Australian Visa or Mastercard debit or credit card. There are two ways to use Afterpay:
- Online. Buy things online and select Afterpay during checkout.
- In-store. While at the checkout in a physical store, use your phone to visit the Afterpay website and enter the cost of your purchase. Then you’ll get a barcode that you simply scan at the cash register.
Two weeks after making a purchase, Afterpay users need to pay back the first 25% of the credit amount. The remaining installments of 25% each need to be paid back every two weeks after that. Customers receive reminders before payments are due to help them avoid missing payments. Purchases over $500 require the first 25% payment to be made right away.
Conditions of shopping with Afterpay
- No interest. The service works as a no-interest loan.
- Easy in-store purchases. Customers who don’t have an account can still use Afterpay. They just need to sign up later in order to make payments.
- Account management. People can see their upcoming payments, orders, and account information.
- Reminders. To avoid overdrafts, Afterpay sends notifications that remind users about upcoming payment amounts and due dates.
- Automatic deductions. Afterpay automatically charges each payment from a user’s chosen card. This decreases the number of failed payments.
- Refunds. With Afterpay, customers can still get refunds according to the store’s refund policy.
- Pay in advance. Users can pay installments ahead of time.
- Security. Afterpay is a PCI DSS Level 1 certified service provider.
How does Afterpay make money?
Afterpay’s main revenue comes from charging retailers fees for offering the service. A small percentage of revenue comes from users’ late fees. If for some reason a charge to a user’s card is unsuccessful, Afterpay will notify the user and give them a chance to choose a different payment method. If the payment still isn’t successful, Afterpay will incur a $10 late fee.
If within seven days the user doesn’t pay the installment, they’re charged a further $7.
Zip Pay by Zip Co. is similar to the Afterpay interest-free payment service.
How does Zip Pay work?
Once users have signed up for Zip Pay, they can make purchases online (by choosing Zip Pay as their payment method during checkout) or in-store. Users can sign in to their Zip Pay accounts and select Zip Pay as the payment method during checkout.
After making purchases, users can choose their repayment frequency:
- every two weeks
The minimum loan amount that Zip Pay offers is $350, and the maximum amount is $1,000. The service requires a minimum monthly payment of $40. If payment isn’t made by the end of the month, Zip Pay charges a $6 monthly fee.
Conditions of shopping with Zip Pay
- Interest-free repayment. Zip Pay doesn’t charge any fees unless a user missed a payment.
- Low fees. The late fee is $6, which is a bit lower than Afterpay and lower than nearly any credit card.
- Credit limits. Zip Pay has three different credit limit options: $350, $500, and $1,000. The company’s algorithm approves each user for one of these limits.
- Simple sign-up process. Zip Pay lets users sign up via Facebook or PayPal.
- Automatic deductions. Users can set up direct debit from their bank accounts.
How does Zip Pay make money?
Zip Pay is free to integrate but charges a merchant fee depending on the kind of business and the interest-free period you choose to offer to your customers. The transaction fee is a maximum of 30 cents per sale, and the more customers pay with Zip Pay, the cheaper the per-customer transaction fee is for the merchant. Zip Pay also makes some money off the $6 late fee charged to customers.
Klarna is one of the most famous buy now, pay later platforms. Today, it has over 80 million customers in 17 countries.
How does Klarna work?
Klarna’s goal is to make the shopping process more streamlined.
Klarna lets users pay for purchases in four interest-free installments. It also alerts customers when their favorite retailers offer deals.
When paying with Klarna, customers are charged the first installment when the merchant confirms the order. The following three installments are automatically charged from customers’ accounts every two weeks. If users miss payments, Klarna charges a $3 late fee for orders under $100 and $7 for orders of more than $100.
Сonditions of shopping with Klarna
- Ghost card. Customers can use Klarna as a payment method at retailers that are not signed up for the service. To do this, they need to use the platform’s virtual Visa card at checkout.
- Returns. If users want to return their purchases, Klarna will make a full refund.
- Slack period. If a user misses a payment, they’ll be given a “slack period” of two to seven business days.
- Low fees. The charges for using Klarna are relatively small.
How does Klarna make money?
As with most buy now, pay later services, Klarna makes most of its revenue by charging fees to merchants. The transaction fee is 30 cents per sale. Some portion of revenue also comes from late fees.
Quick summary of buy now, pay later
We hope this article has shed light on the world of buy now, pay later technology. Here are the key takeaways:
- To ensure a smooth checkout process, use a BNPL provider that integrates with your existing POS system.
- Research the fees of different providers to choose the most suitable solution. It’s best to choose a trusted payment provider with a strong user base. A well-known BNPL provider will showcase you to more people and attract customers to your store.
- Attract your customers’ attention with an official announcement of your new payment option.
If you want to implement a buy now, pay later option for your business or if you have any questions regarding this topic, contact Mobindustry for a free consultation.