The term ‘Buy now pay later’ (BNPL) is what we think of when customers can take home their purchase but pay for it over time.
Once, this kind of ‘pay later’ shopping was about applying interest-free periods after the purchase, during which no payments are made, and no interest charged. Immediately following this interest-free period, payments were expected in full, otherwise the interest from the original time of purchase was added. That interest could be substantial.
It’s an option that seemed good – on the surface at least – for the consumer, in that they had the ability to pay for things over time. The ‘slug’ of the interest hit was something that could be managed by those who anticipated or planned for it. Winning out of this situation – invariably – were the credit providers, reaping the benefits of a higher-than-average interest rate.
A recently released Accenture report identified the economic impact experienced in 2020 by BNPL platform Afterpay. Amid the economic tumult of that year, Afterpay generated $6b in incremental sales for retailers, and more than $3b in net benefits for 48,000 Australian Afterpay merchants, including 38,000 small and medium-sized businesses.
Afterpay’s claim is that they drove this jump in retailers’ incremental sales through improved online checkout conversion rates, larger customer basket size, exposure to new customers, increased customer engagement and a rise in repeat purchasing (frequency). Of the merchants identifying increased sales, 43% reported that sales increased by more than 10 per cent after adopting the methodology.
It paints a vivid picture of what the retailer experience can be thanks to BNPL options. For Andrew Toon, the General Manager, Payments for PayPal Australia, giving consumers the option of splitting their payments into different segments formed the genesis of the company’s new ‘Pay in 4’ capability.
“We have hundreds of thousands of retailers in Australia, and millions of retail partners around the world, and we’re essentially responding to the expectations and requirements that they have,” he said. With 9.1 million active Australian customers, and 392 million active users around the world, PayPal are doing this based on feedback from merchants and retail customers, and consumer expectations.
PayPal’s ‘Pay in 4’ option allows consumers the choice of dividing their purchase payments into four instalments and pay using their existing debit card or credit card they have linked to their PayPal account.
“We’re offering it at no additional cost to merchants,” Toon says. “Merchants get paid straight away, all of the existing PayPal security protections apply, so PayPal buyer protection is still applicable for those retail customers. It really is about taking an existing customer experience that they’re used to, and just enhancing that.”
But is ‘sales’ the sole driver in their use of BNPL payment methods? One retailer suggests that a key factor is market expectations.
Angus McDonald is the CEO of noted retail chain Barbeques Galore. McDonald’s fleet of 87 nationwide stores are not what the retail sector would typically find at the heart of BNPL set-ups, being that their key business – barbeques, outdoor furniture, and heating – are not the standard ‘impulse purchase’, the foundation of the BNPL business model. But to him, the BNPL payment methodology improves sales through increasing customer options.
“You’ve removed a barrier to purchase; you’ve made it easier for the customer to buy the product,” McDonald said. “Naturally, that leads to more sales than you otherwise might not have captured. The challenge for many retailers is that they’ve been offering these products for a number of years. That incremental sales opportunity has already been realised. You’ve already grown your business by introducing that payment type. Now you’re faced with the cost of actually losing sales if you remove those options.”
He says the chain has experienced incremental sales from BNPL options as a natural follow-on effect of an increase in payment methodologies.
“Anything that removes a barrier to purchase obviously translates to an increase in sales. Particularly in the early adoption of the BNPL payment types, that was certainly true. What I would say though is that rather than it being a point of difference, it’s becoming a point of parity. It’s really necessary for you to provide the suite of options that your customer expects of you. Less about incremental sales, and more about providing that expected suite of options.”
The chain offers four separate BNPL options, but McDonald says that taking on new methods requires them to be making a unique service offering.
“Obviously, there are many BNPL products that are quite similar in the market, and there is certainly some overlap in the different products that we offer, but there are a suite of products that cover a range of different purchase occasions.
“We go from the smaller purchase, broken up into four payments-type BNPL solution, through a range of different options up to that traditional long term, higher value finance product. These are the 36-month interest-free products that are available.”
The key difference to what those products were like years ago is, according to McDonald, is that the customer has more choice and control.
“It’s much more controlled by the customer, where they are choosing the finance product they are looking to deploy, and the type of solution they want to use, whether that is an interest-free product or a layby type product; it’s less about the retailer facilitating that process for the customer, more about the customer having the option to pick the product that suits them best.”
The cost of running these solutions often falls on the retailer. Knowing that, does McDonald see any merit in surcharging for these solutions? For him, the cost of these solutions provides a major challenge, but the market is an ever increasingly competitive one.
“I don’t think applying surcharges from a retailer’s perspective is a good idea, when you apply fees and charges to some things, you may recover some costs, but ultimately you’re going to significantly drive down conversion. Clearly, there’s a cost that needs to be accommodated, that needs to be built into the cost structure of your business. All retailers would be looking to take advantage of the increasing BNPL competition in the market to drive down the cost of those services that they’re providing to their customers.
“It does give us the opportunity to ensure the pricing options we have for our customers is commercially sensible, and we can maximise the value we’re able to pass on to our customers.”
Angus McDonald sees BNPL payments as a necessary thing to have, essentially to meet the expectations of his existing customer base, rather than something that works to expand the base beyond its current size. Given its traditional nature as not being among the impulse purchase sector among retailers, the Barbecues Galore example does illuminate how embracing BNPL payments would be a wise move for the broader retail sector.
PayPal’s Andrew Toon sees much scope for evolution in the BNPL space; in a function he calls ‘the reverse layby’, which was virtually unheard of five years ago.
“Online shopping and digital payments will continue to evolve, and PayPal is working to be at the forefront of that evolution.
“We’ll continue to bring further options to continue to deliver that choice, that flexibility, along with the security the customer expects of us. 71% of online shoppers trust PayPal to support them in their online shopping from a security perspective.
“And we continue to look at ways to enhance that digital wallet experience that our customers expect.”