While retailers strive to maintain revenue during COVID-19, many are embracing buy now, pay later (BNPL) payment options. As consumers more carefully evaluate the importance of each purchase, many are gravitating toward merchants that offer flexibility. BNPL, today’s version of layaway, is becoming increasingly popular for consumers seeking the balance between managing budgets and the need to immediately acquire products vital to their daily lives. BNPL is an alternative payment method that embodies both flexibility and control by enabling consumers to get the products they want first and submit payment later. 

Not Your Boomer’s Layaway: Buy Now, Pay Later App Downloads Surged in 2019

BNPL is a payment option that allows customers to pay for products after the point of purchase. Typically, BNPL platforms offer consumers a specific duration of time in which they are expected to make incremental payments – often weekly or monthly – for the products they acquired. BNPL fintech companies, such as Klarna, AfterPay, Affirm, Splitit and Sezzle, have experienced immense growth in the last two years. From 2018 to 2019, downloads of BNPL apps increased 162%, according to the Buy Now Pay Later March 2020 Tracker report published by Pymnts.com. 

In its 2019 earnings report, Stockholm-based Klarna confirmed monthly active users hit 11 million globally and the platform processed an average of 1 million transactions per day. 

Afterpay use was also on the rise according to it’s H1 FY20 Financial Results Presentation. From July 1 to December 31, 2019, Afterpay reported a 134% increase in active customers. The surge in active users continued into 2020. Afterpay’s total number of U.S. customers hit 4.4 million by the end of March 2020. As more consumers spend time online, COVID-19 may continue to propel growth among BNPL companies. 

Born From The Great Recession, Buy Now, Pay Later Joins The Alternative Payment Method Evolution

The financial effects of the coronavirus are mirroring that of the great recession, which in 2008 spurred consumers to welcome alternative payment methods while they avoided incurring fees, interest and further debt from credit cards or personal loans. Among Millennials and Gen Zers, the Great Recession reinforced the value of paying via installments over time with less risk. Shane Happach, EVP and Head of Global eCommerce at payment technology platform Worldpay, highlights BNPL consumers as “budget conscious and credit averse.” Consumer sentiments among Gen Zers and Millennials, who prioritize the ability to make purchases online or via mobile and maintain control over their debt, have prompted a broader acceptance of BNPL options.

Although recent data shows most consumers identify credit cards as their preferred method of payment, shifts in economic conditions and generational buying power could increase the market share represented by BNPL fintech companies. The Global Payments Report 2020 by Worldpay projects that, in the next three years, while credit card transaction volume will fall, BNPL transaction volume will grow by at least 54%. 

Similar to their credit card counterparts, many BNPL startups attract customers by offering sought-after benefits such as interest fees as low as 0% and no late fees. Unlike a credit card which offers a pre-approved credit line, BNPL apps offer point of sale (POS) installment loans. Many BNPL POS installments are micro loans which do not require hard credit checks against a consumer’s record. This is appealing to consumers because it allows for purchases that will not max out their current credit card limit while also preventing credit inquiries from affecting their credit score. Credit card interest rates have a reputation among some shoppers for being both high and unforgiving. Additionally, revolving unsecured debt can become a vicious cycle which could lead to lasting negative effects on a consumer’s financial health, often in the form of a lowered credit score. BNPL merchants may appeal to consumers because purchases completed through their platforms efficiently process transactions, both online and via mobile, with a lower perceived level of risk. 

Merchants Are Attracted To The ROI Of Flexible Payment Options

Online retailers must consistently focus on engaging their customers, driving repeat business, increasing average dollars spent per transaction and limiting cart abandonment — but they are also considering the cost effectiveness provided by each payment method featured on their sites. Payment methods can help scale conversions or discourage customers from completing transactions. Even though BNPL platforms typically cost merchants more to use compared to credit cards, the alternative payment platforms indicate stronger performances related to the KPIs most important to retailers. The following BNPL platforms all reported increased average order value (AVO) for the retailers who implement their technologies: 

• Affirm AVO increase of 85%
• Splitit AVO increase of 20%
• AfterPay AVO increase of 20-30%
• Klarna AVO increase of 45%

As most brick-and-mortar locations remain closed, driving online sales is vital for a retailer’s survival. With the economic and societal shifts resulting from COVID-19, many retailers are trying to increase online transactions while overcoming a consumer’s motivation to save versus spend during challenging times. Merchants who have implemented BNPL options at checkout have experienced positive results in acquiring new and high LTV customers, improving their shopper’s experiences, growing AVO and minimizing cart abandonment. 

COVID-19 Habits Accelerate Growth In Hobby, Home Office, Fitness And Home Appliance Purchases Among BNPL Platforms

As economic uncertainty grew, it seems many consumers were more comfortable purchasing a variety of essential items when they had the option to make smaller payments over time without adding to their credit card debt. 

Klarna Users Avoided Boredom: With most Americans staying at home, Klarna has reported upward trends in spending on leisure, sport and hobby products. Among Klarna’s 1.1 million monthly active users in the U.S., the BNPL platform highlighted week-over-week increases of 6% for Gen Zers, 5% for Millennials and 10% for Gen Xers from the week of March 22 to March 29. Klarna also reported upward trends in purchases related to home and garden such as furniture, tools and home improvement. The DIYers and designers are filling their time and spending more money in the process. From the week beginning March 29 compared to the week beginning April 6, spending volume in the home and garden category grew among Gen X by 2%, Millennials by 5% and Gen Z by 26%. 

Social Distancing Prompted Users To Purchase Appliances, Fitness Items And WFH essentials: As more consumers headed to the kitchen to dine in home while eating out was on hold, Affirm reported a 70% increase in purchases in the kitchen supplies category. As gyms and fitness facilities remained inaccessible in many regions of the U.S., many consumers were motivated to seek alternatives for their fitness needs. Spending volume from March 15-April 8, 2020, compared to the period of January 1-March 14, 2020, was up 160% in the home fitness category with large transactions for brands like Peloton, Mirror and Tonal. The national work from home transition for many was also the catalyst for sudden and increased spending for home office items such as standing desks and monitors. 

Convenience And Optionality Will Be Key Drivers For Retail Success

Even before the effects of COVID-19, consumers showed a strong preference for convenient and connected omnichannel experiences. The continued evolution of these expectations supports additional growth in alternative payments methods like BNPL. As customer preferences transform with market changes, retailers who embrace shifting expectations have the highest propensity to reap rewards in the form of increased sales and new customer conversions. Retail brands who offer a variety of checkout options have a greater probability of appealing to the needs of multiple consumer segments. To sustain future success, brands need to embrace the variety of consumer needs and highlight optionality. 

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