eCommerce BNPL: Who should DO it—Who should AVOID

While the Gen-Z and millennials are considered the most ardent adopters of this way of paying up, the rest of the world also seems to be catching up with Buy Now, Pay Later.

It is a payment method which is an alternative to:

- Paying the full amount at one go

- Paying it in installments, but having to pay a steady interest

Buy Now, Pay Later or BNPL has become the relatively new option on the block to combine the best of both worlds. 

In fact, a study has revealed that 67% of BNPL users think this option could potentially replace their credit cards in the future. 

This piece by Convertcart aims to shed light on the following:

What are the BNPL trends revealing?

Should you consider BNPL for your business?

When is BNPL not a great option for you?

What kind of BNPL option should you go for and why? 

Potential risks to watch out for

What are the BNPL trends revealing?

Here’s a quick snapshot of data that clearly says BNPL is here to stay, despite the concerns over defaulted payments & credit score damage:

- Across the world, it is said that there are 360 billion BNPL users

- The BNPL market is said to grow to about $ 596.7 billion by 2026, at a CAGR of 33%

- Between 2019 and 2021, the number of BNPL loans originating in the US grew by 970%

- About 1 in 5 BNPL users live in the US

- Every US $2 spent out of $100 is said to happen through BNPL

- 39.4% US shoppers use BNPL options to avoid paying credit card interest

- Check-out shares from BNPL have increased from 30% to 50% for some eCommerce merchants – for some, it’s spiked up to 80%

- Research by Klarna reveals that flexible payment options would encourage 36% of shoppers to transact with a brand more than once

Apart from the fact that BNPL adopters seem to be growing at a rapid pace, it appears that if eCommerce businesses can responsibly leverage this method, then they can attract more customers as well as purchases. 

Mobile payments on your mind? Read: Make your mobile payment page “conversion-friendly” (13 UX hacks)

Should you consider BNPL for your business?

This can be a tricky question to answer, because certain conditions make BNPL ideal for one eCommerce merchant, while other factors make it questionable for another. 

At ConvertCart, what we’ve often noticed is that a business’ primary goals play the most important role in this decision. 

For example, if you want to acquire new customers without necessarily offering a price advantage (like discounts, coupons etc.) like a competitor does, your edge could in fact be a BNPL mode of payment. 

Here are a few reasons that make a strong case for BNPL to be integrated into your spate of payment methods:

- To attract new (& younger) customers on priority

BNPL has the ability to speak to a wider base of customers, because of the flexibility it offers. 

If your business operates in a category where shoppers belong to the Gen-Z and millennial crowd, it makes even more sense – because many of them structure life from paycheck to paycheck, spending power instantly improves with the option to buy now, pay later. 

For example, if you have a luxury clothing or fragrance brand, and you’d want to extend your customer base to the younger folk – then BNPL could offer the very flexibility that they’re looking for. 

Considering this is the group of shoppers that is projected to do 35% of the total of all daily per person spending by 2030, you may want to give this an even greater thought. 

- To increase AOV & ATV

Which eCommerce brand doesn’t want to see a significant increase in their AOV? 

An eCommerce case-in-point is the brand Relax the Back, which initiated the BNPL split-into-4 option through Klarna to increase the ease for their shoppers. 

As a result, Relax the Back was able to increase AOV by 150% more than usual. 

- To improve purchase frequency

Since BNPL increases the financial freedom that eCommerce shoppers feel within a window of time, without having to make multiple massive payments, they can actually focus on making more purchases. 

This instantly impacts how much they’re able to spend over every transaction – improving the ATV in the process. 

In fact, one study found that 38% shoppers use BNPL to purchase at least once a month, while 9% use this method to pay up more than once a week. 

- To improve conversions

Whether it is for high ticket items or low ticket ones, eCommerce shoppers often shy away from an actual purchase. 

The reasons range from “this is too expensive for me!” to “do I really need this right now?”

Research shows that merchants who have integrated BNPL into their payment ecosystem, have actually enjoyed a 2.1% more conversion rate than those who haven’t. 

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When is BNPL not a great option for you?

While the case for BNPL is a strong one, there are some instances in eCommerce where as a merchant, you’ll have to step back and reconsider:

- If your margins are low

This can have a direct impact on your bottom line, because think of the fee you’d have to pay per transaction – it would hold true even if you deal in high volumes.

A case of low margins can also mean you simply won’t have the funds to spend on a tech integration that’ll make the BNPL option effective during checkout. 

And without proper integration, running a BNPL option is a bad idea – because it is at the checkout stage that most BNPL providers run soft checks on a customer’s credit worthiness to ascertain they are within the financial bandwidth to take care of the loan. 

- If your AOV is usually less than $50

Let’s say you clock AOV of about $30 – then this is not in line with the BNPL format, because loans typically start at $50 and go all the way up to $1000.

With a lower AOV, you may run into the classic problem of negotiating with fees made applicable by the BNPL provider.

For example, some providers may charge a 4-5% commission along with a fixed charge plus sales tax for every product sold. 

With a poor AOV, the amount you can finally keep as a retailer after paying the provider can be low in turn – and this is obviously bad news for your bottom line. 

With a high AOV, BNPL still works because despite the applied charges, a business still gets to make decent ROI. 

- If your brand’s larger narrative is not aligned with BNPL

Since flexible payment methods are also seen as overly commercial and financially motivated, they may not lend to your larger brand perception – especially if you convey brand messages like exclusivity or social responsibility.

This extends to paid advertising that merchants need to rely on as well – so that audiences become aware that their brands indeed offer this method of payment. 

However, with businesses that either have a social responsibility clause or an exclusivist edge, paid ads on BNPL can turn into an antithesis to the brand voice they’re nurturing and promoting. 

- If your business thrives on cross-border payments

Especially for big-ticket items a longer installment period could mean exchange rates fluctuating – and though most major BNPL players absorb the positive & negative effects of cross-border currencies fluctuating, it might not be offered by smaller players.

Cost absorption due to currency fluctuation becomes the main point of concern in cross-border eCommerce payments. 

For example, currency exchange rates can differ between installments and as a result, the value of money can drop. In such a situation, the business will likely have to absorb the blow. 

Why traditional credit has continued to thrive in cross-border payment situations is because they typically have built-in processes to absorb the shocks of currency fluctuations. 

What kind of BNPL option should you go for and why? 

Buy now, pay later is an umbrella financing term for a number of Point-of-Sale financing solutions. 

In this section, we’ll look at what they are and which option would work well for you, given which category you serve through your eCommerce business. 

- The Pay-in-4 option

This is definitely the most-used format by eCommerce businesses that work with small-ticket items. 

The COVID-19 pandemic ensured this also became highly adopted in the US. 

This model works ideally for products that are priced at $250 or less, making it ideal for clothes, affordable makeup and even groceries. 

In this method, shoppers buy products worth an amount and then pay it typically over a period of maximum 6 weeks – without having to incur an interest. 

This model is also brilliant if you’re looking for widespread adoption for your brand. 

This is possible because the largest providers have made apps available within which shoppers can decide to shop from merchants that may not have that specific BNPL provider available at checkout. 

For example, Klarna users may want to shop from Amazon, but the latter does not have this option integrated on the storefront – but they can still access the third-party giant’s products through the Klarna app. 

- The cardless financing option

This option is best suited for mid-sized ticket items. 

So if you’re a business that handles purchases anywhere between $250 and $3000, this is the right BNPL method to go for. 

Cardless financing works well for eCommerce businesses that sell furniture, fitness equipment, affordable medical equipment, home goods and even travel-related products. 

Unlike the pay-in-4 option that requires the shopper to pay zero interest, cardless financing makes a small annual percentage rate (APR) imperative – if the APR is high, often the eCommerce merchant subsidizes a part of it. 

- The rent-to-own option

If you’re in the rent-to-own space in eCommerce, this model would then make the best sense because it optimizes POS loans for those who don’t have a great credit record or dislike depending on credit cards. 

Categories such as electronics, home appliances, furniture and jewelry can all come into consideration under this option. 

Potential risks to watch out for

Everything comes with a caveat, and it’s not all that different with BNPL options as well. 

Here are a few risks and challenges BNPL is associated with:

- Overspending

Many merchants end up paying anywhere between 3% to 7% more processing fees for BNPL options as compared to other options like credit cards. 

For eCommerce merchants keen to offer multiple BNPL options to attract a larger base of customers, this can lead to overspending. 

This is a major consideration if you’re working with tighter margins or have budget crunches going on. 

- Non-transparent disclosures

While most of the large BNPL players work effectively around strict regulatory laws, not all do. 

In fact, this is what led the Consumer Financial Protection Bureau to issue a series of orders to five of the largest players (Paypal, Afterpay, Affirm, Klarna and Zip) to gather information on the risks & benefits associated with their operations in 2021. 

- Online fraud

When it comes to BNPL options, a few different kinds of online fraud seem to be rampant. 

The most observed is friendly fraud. 

This occurs typically because shoppers buy big-ticket items that they may not be able to pay back for in the long term. 

It can also occur when shoppers are not mindful of recurring payments, and choose to dispute legitimate transactions, because of which a chargeback results. 

Account takeovers are also said to be frequently common in BNPL, simply because bad actors are able to access more products in an eCommerce BNPL situation, instead of a singular item for purchase. 

Buy Now Pay Later - FAQ

- What makes BNPL successful in eCommerce?

BNPL has achieved great adoption in eCommerce because merchants find it easier to attract shoppers when they break down payments into smaller parts – and similarly, shoppers feel convinced because they’re not slapped with high interest rates on the installments. 

- Which BNPL is best for eCommerce?

Affirm is often considered to be the most ideal BNPL option for eCommerce because it’s primarily consumer-centric and helps shoppers make everyday purchases.

They also feature no fees of any kind – not even a late fee applies on Affirm. So it’s a win-win for both shoppers and merchants. 

- Why do shoppers prefer BNPL?

Shoppers across the world have begun to prefer BNPL options because the associated approval processes are way simpler than those around credit card payments. 

Some BNPL options are naturally also considered because they don’t overstress a shoppers credit score. 

BNPL or not – CRO can change your eCommerce game

98% of visitors who visit an eCommerce site—drop off without buying anything.

Even if that site features a plethora of payment options, amongst other features.

Why: user experience issues that cause friction for visitors.

And this is the problem Convertcart solves.

We've helped 500+ eCommerce stores (in the US) improve user experience—and 2X their conversions.

How we can help you:

Our conversion experts can audit your site—identify UX issues, and suggest changes to improve conversions.

And we won’t charge for this one.