Why merchants should be considering the buy now, pay later model

It seems as though 2020, with all its many surprises, may be surprising a few more people with how early stores are pushing the holidays. I visited both Lowe’s and Home Depot in early October only to find that they have put out their assortment of dazzling Christmas trees. But why are retailers trying pushing the holiday shopping agenda so hard this year? Spoiler alert: it is the pandemic.

Retailers are looking to the holidays to start making up critical ground lost earlier in 2020 and hoping that encouraging shopping earlier will help boost their numbers, but retailers should also be looking to extract more value from their payment strategies.

So let’s analyze the situation. In one corner, you have retailers hungry for sales. In the other corner, you have many unemployed Americans looking for jobs and employed Americans being mindful of their bank accounts preparing to weather another coronavirus surge. It is quite the gap to bridge. This gap, however, can narrow by returning to something many Americans remember – installment payments.

There has been a dramatic and modern shift in the buy now, pay later (BNPL) model. A cast of players has emerged in recent years, ready to capitalize on consumers who do not want to load up their credit cards.

Why buy now, pay later?

You may have seen these companies listed as payment options during your last e-commerce shopping experience. They have slick names like Quadpay, Afterpay, Klarna, Affirm, Sezzle, and PayPal Credit – even companies like Google are jumping in the game. In short, these companies allow customers either to pay by interest-free installments or to finance their purchases, often offering payments every two weeks. It’s for this reason that over a third of U.S. consumers have already used a BNPL service to make a purchase, according to a survey conducted by The Ascent. These installment plans have a technical name called retail installment sales contracts (RISCs).

BNPL has been most popular with Millennial and Gen Z shoppers who want to stretch that purchase between paychecks or avoid paying credit card interest. BNPL also increases the purchasing power by allowing customers to make larger value purchases knowing that they will have time to make payments and doing so from a debit or credit card. Afterpay says its average purchase is more than $100. Furthermore, a 2020 study found that consumers spend 55% more at stores when offered BNPL options.

Equally important, customers are more likely to repeat purchases at merchants providing these options. In fact, 65% of BNPL users have made two purchases within six months of each other, according to data released by Afterpay. Moreover, 44% of BNPL users say they would not go through with purchases if these options were unavailable. Many of these BNPL providers are also assuming the risk for the transaction.

What is the downside of buy now, pay later?

If you are a consumer, you have noticed many of these companies focus on just four payments, and there is a reason for this. The federal Truth in Lending Act’s (TILA) Regulation Z applies only to consumer credit where a finance charge is payable or the agreement exceeds more than four installments. The same can be said for many state laws. That being said, these plans are not entirely without fees for consumers.

There are fees and finance charges for missed payments. Customers may incur not only fees but may potentially harm their credit scores if they miss payments. Among those who have used a BNPL service, 21.68% say they’ve been late with a payment or incurred late fees, according to a survey conducted by The Ascent. Furthermore, 29.65% of consumers say they don’t understand the terms and conditions of these services at all. Consequently, customers who are upset with these fees may associate the penalties and harm with the retailer and not the RISC provider. This elevates the reputational risk associated with these plans, especially since there are many permutations of RISC arrangements.

The downside for some retailers may be the cost associated with using a RISC provider. The challenge for retailers has always been how to grow a customer base, increase spend, and instill loyalty. While RISC providers can help a retailer achieve these goals, the question for retailers will be whether the cost of using one of these providers is worth it and whether those goals are something that they could achieve themselves.

Retailers looking to partner with RISC providers to offer such options to their customers need to first carefully review their contracts and pricing models to ensure that the sale acquisition cost makes sense. The customer journey and messaging regarding the retailer’s relationship with the RISC provider should be made clear to the customer to ensure that the retailer can distance itself from potential reputational or legal risks.

The advantages of a RISC arrangement are clear, and many major retailers are jumping in the game and reaping the benefits.

The caution here comes from these services being fairly new and emerging payment type in a less regulated part of the financial services industry with the risk of reputational harm to the retailer. If you are a retailer seeking to extract value from your payments value chain, Redbridge can assist in evaluating all facets of the value chain and target efforts to meet your goals.

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