Even before the pandemic, a transition to digital payments had long been underway, though the trigger has drastically accelerated consumer preference for using flexible payment methods that provide seamless checkouts — both online and in-store. In fact, as these consumer behaviors solidified a study conducted by PYMNTS and PayPal during the 2020 holiday season found that 57 percent of consumers’ willingness to shop with merchants was impacted my digital payment offerings with a third of consumers reporting they would not even consider making purchases in-store if the retailer did not offer digital payments.
Notably, within the rise of digital payments, young consumers have also escalated the use of buy now, pay later options finding it key to fueling online shopping — even using it to spend more per purchase. According to a study by Cardify.ai, the consumer spending data firm, more than 49 percent of people are spending more when using a BNPL service than they would spend on a credit card.
Still, various installment plans, like layaway options, have been around for years so why is BNPL gaining so much popularity? According to Dr. Carolyn Mair, behavioral psychologist, business consultant, and author of “The Psychology of Fashion,” the option offers consumers a great deal of temptation. “It’s just so easy,” Mair said. “It seems like a credit card, but they aren’t going through credit checks as you would with a credit card or store card and there is the idea of not paying interest.”
What’s more, said Mair, is the BNPL model often encourages consumers to check out with a cart fuller than they had originally intended — perhaps buying shoes to wear with the dress they came to buy. And Cardify.ai’s report further echoes the sentiment with data finding that consumers are using BNPL out of choice, not need to buy luxuries they might not otherwise purchase or even encourage consumers to buy more at one time.
“As a way of growing share of wallet for brands it’s very interesting,” said Sarah Willersdorf, managing director and partner, global head of luxury at Boston Consulting Group. “And maybe that means a consumer splurging on the basket builder that they maybe wouldn’t have bought before. It’s very exciting as a payment vehicle to be looking at how its evolving the industry especially in the next couple of years when coming out of COVID-19 and in the U.S. coming out of political unrest.”
Notably, Willersdorf said, these younger consumers who are key users of BNPL are also largely driven by sustainability and, moreover, how their shopping behaviors create an impact wherein consumers spend more to buy less. “This type of payment vehicle does lend itself to this market trend,” Willersdorf said. “It’s basically buying fewer things of better quality as opposed to just having so much stuff.”
Though at the same time, Boston Consulting Group’s research shows that Millennials, especially young Millennials, have been some of the hardest hit by the economic environment across the globe, making the need for flexible financial options has also become more of a demand.
“You saw buy now, pay later in the fashion, and even luxury space, start to come around pre-COVID-19 but like many things it has accelerated with COVID-19 and it’s driven by demand and supply,” Willersdorf told WWD. “On the demand side when we think about the consumer [it’s the] mind-set shifts which are driving them. Our research shows that Millennials were the hardest hit financially, but they’re actually the most optimistic around the future so it’s kind of its a nice balance. But certainly, the number one reason is that they’re looking for value.”
The second mind-set driving both Millennials and Gen Z consumers toward BNPL options is the transparency they offer in comparison to credit cards, which they see as having hidden fees and confusing terms of agreement. And third, she said, is a sense of control over finances. “This is a generation that is heavily into subscription and used to paying monthly or weekly for all sorts of payments even fitness and media. If you are thinking about budgeting, it is really easy for [consumers] to break things down into monthly costs.”
According to Eric Shea, managing director of Accenture Strategy’s retail industry sector, as it becomes more commonplace to rent or share things, paying subscriptions will be a trend that we’ll likely continue to see in retail. And in the case of offering young consumers the ability to receive the item while paying in installments is one-way retailers can help consumers.
“What’s different is that these, these financial offerings are fully integrated into the shopping experience. And it’s really quite easy,” Shea said. “One of the big differences is that we’re able to offer these kinds of solutions in place without [consumers] needing to leave the site to go apply for a credit card. The retailers are doing a great job and working with partners to make it very easy for their customers and making it very seamless. And I think part of that goes beyond just the financial need, I think that younger generations are getting more used to paying for things on subscription.”
And further, as younger generations have adopted the subscription model, it is important to remember that this demographic has also used credit cards and cast differently than consumers of older generations and have been more accepting of the interest-free offer that BNPL solutions provide.
“There’s sort of some of the research that we’ve seen indicates a different viewpoint around spending and saving,” said Zach Aron, U.S. banking and capital markets payments leader and coleader of the global payments practice at Deloitte Consulting. “We definitely see a group that is a little more debt-averse and debt conscious so [BNPL] is a product that is also geared because of being able to pay in installments [allowing consumers] to have a smaller size of underwriting. It meets a specific need and it corresponds to that different attitude.”
Though the presence of BNPL solutions have gone beyond a seamless checkout. Moreover, providers have become brands themselves, building relationships with consumers who look to the payment method first when shopping. And in that way, BNPL companies have become better partners for retailers building trust between the consumer and the retailer not only by taking on the financial risk but also as a marketing platform.
“You have many new companies doing buy now, pay later in a sort of chic, young, modern way,” Willersdorf said. “I always say it’s sort of not your grandmother’s financial instrument. The fact that a lot of these vehicles are thinking about how to do co-marketing campaigns and personalized experience and other things is an added benefit if they can be done in an on-brand way.”
But with many BNPL players in the market how can a brand know who to partner with? Aron said brands need to do due diligence as with any investment. In fact, he said, the questions to ask are twofold with one aspect being how the product enables a great checkout experience both in terms of speed and providing choice and the second being how it will help provide better insight about customer trends.
To note, some BNPL platforms have recently been flagged in the U.K. by the Financial Conduct Authority for encouraging consumers to accrue debt. The FCA published a ruling on Feb. 2 that BNPL products “should be brought within the regulatory perimeter as a matter of urgency.” According to the FCA, the use of BNPL platforms almost quadrupled in 2020 with 5 million people using the products since the beginning of the coronavirus pandemic in the U.K.
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