Introduction
In this article, we will discuss how to reduce abandoned shopping carts using the buy now, pay later option. In light of the exceptional events we witnessed in 2020 and their negative impact on the global economy, brands must consider ways to lower the purchase barrier for consumers. Flexible payment options are a frictionless method to enhance ongoing consumer spending during uncertain economic times. It allows consumers to buy immediately and split payments over a period of time.
How does the buy now, pay later option work?
Buy now, pay later solutions are integrated into online payment processes and allow customers to pay for products in installments. Although financial terms may vary from company to company, each company enables consumers to get what they want immediately and pay over time.
Benefits of the buy now, pay later option
Buy now, pay later options are considered a cost-saving alternative compared to credit cards, which typically charge an average annual percentage rate of 17.14%. Additionally, the buy now, pay later option is a way to reduce abandoned cart rates. According to research, shoppers left over $34 billion in online shopping carts in 2018, and if companies offered additional financing options, conversion rates would improve.
Why do consumers buy now and pay later?
Buy now, pay later options emerged after the recession when banks reduced loans granted to consumers. The convenience of being able to obtain purchases immediately by paying a small portion of the cost upfront is what attracts many consumers to buy now, pay later options. This option can now be used to finance low-value products such as clothing, shoes, cosmetics, and even school supplies.
The future of the buy now, pay later option
Although the buy now, pay later option is not new, it has now transitioned online. Data supports that offering installment financing increases sales. However, interest and fees still exist, even if they are disclosed more transparently or at a lower cost compared to other forms of credit. Competition in this field is increasing, and with installment payment options available at points of sale, they are less likely to give merchants a competitive edge within their industry. This may also lead millennials, who are cautious about taking on credit card debt, to overuse credit and increase their debt levels.
Why do merchants offer the buy now, pay later option?
The buy now, pay later industry is experiencing rapid growth, with Affirm’s loan volume exceeding $2 billion in 2018 and Afterpay’s annual sales exceeding $8.5 billion. Loan growth is the primary metric by which investors measure these companies, but the true test is whether brands benefit from offering installment payment solutions.
According to Klarna, adding financing at checkout allows consumers to spread their costs over time and pay at their desired pace. Financing also increases consumer purchasing power and leads to sales growth. Klarna states that brands offering installment payment financing achieve: a 58% increase in average order value (AOV) and a 30% increase in conversion rates at checkout.
Similarly, Afterpay states that merchants using their payment option see improvements in purchase frequency, loss rates, and customer lifetime value. In Australia and New Zealand, the company indicates that customers who joined Afterpay between 2015 and 2017 are now purchasing at a rate of approximately 22 times a year. Newer cohorts follow this upward trend similarly, with FY18 and FY19 cohorts purchasing at rates of 14 and 7 times per year, respectively.
According to
For Affirm, merchants offering an installment payment option can expect a 20% increase in conversion rates and an 87% increase in average order value (AOV).
However, not everyone is enthusiastic about the rise of the buy now, pay later option. Critics argue that installments, even those creatively packaged and marketed, are just hidden ways to entice young consumers to take on more debt for things they don’t really need.
The Future of Buy Now, Pay Later
The buy now, pay later option is not new; it has just moved online. Data supports that offering installment financing increases sales. However, interest and fees still apply, even if they are disclosed more transparently or are less expensive compared to other forms of credit. Competition in this space is increasing, and with installment payment options available at the point of sale, they are less likely to give merchants a competitive edge within their industry. This could also cause millennials, who are wary of taking on credit card debt, to overuse credit and increase their debt levels.
Brands that offer installment payment options must remain cautious in their approach. Despite good intentions, customers who fall behind on payments can face credit score deterioration. Ultimately, this could decrease their long-term value and result in only temporary sales. There are also reputational risks for the brand if customers who fall behind on payments see the merchant as a partner in their financial struggles.
Despite the risks, facilitating payment processes and making them affordable boosts sales in the retail sector. Especially for consumers who are cash-strapped after the holiday shopping season, installment financing provides a means for both the consumer and the merchant to get what they want.
Source: https://www.shopify.com/enterprise/buy-now-pay-later
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