(This article originally appeared in the Philadelphia Inquirer)
Some of your customers may not have enough cash readily available to buy your products. Others may prefer not to use a credit card. So does this mean you lost the sale? Some small businesses are learning that this may not be the case. That’s because they’re offering Buy Now Pay Later (BNPL) as another payment option.
BNPL is not too different from those layaway plans that your grandparents may remember. A customer buys an item in your business and, after making a deposit on the item, pays it off usually over the next two to twelve months and with no interest during the pay down period.
Consumers seem to love it. C+R Research, a marketing insights agency, says that before the holidays about 60% of U.S. adults have used it when buying products and of those who’ve used it, 80% planned on using it for holiday gift-buying.
It’s also very popular among GenZ and Millennial buyers, with more than half saying they have bought a product on social media using the option, according to a study from StitcherAds. During the holiday season, revenues from BNPL plans rose 21 percent from the previous year, according to a report from technology firm Adobe.
Conshohocken-based David’s Bridal has been using BNPL for more than 16 months, and with great success. “We continue to see increased adoption and conversion with our BNPL option,” says Laura McKeever, a senior brand manager at the company. “The sign-up process is quick and easy, making the customer experience seamless from the moment she walks in [or visits our site] to the moment she checks out. It’s now a payment option both online and in almost all 300 of our U.S. locations.”
BNPL works like this. A retailer — whether selling in-store or online — signs up with a provider like Afterpay, Affirm, Klarna, PayPal Credit, and Zip. When it comes time to purchase, the customer can choose BNPL instead of paying by credit card or cash. The BNPL service does a quick online credit check, generally relying on the customer’s credit history. The merchant then gets paid in full and the customer leaves with the product and the commitment to paying off the purchase in the near term.
If you’re a small business, the offering gives your customers more payment options and helps you sell your products to customers who might not otherwise have purchased it. Many are crediting BNPL with generating more revenues over the holidays.
“We’re seeing average order values through our BNPL service of up to 40% higher than regular checkouts,” says Erin Houston CEO & Co-Founder Wearwell, a membership platform where customers can shop for sustainable clothes and accessories. “The increased revenue opportunity is by far the most positive impact.”
Liz Pagonis, the chief marketing officer for Philadelphia Runner is also a fan. She says that BNPL has “been great” for their business — which has five locations in the area and an ecommerce site — because of the flexibility it gives.
“We want people to invest in their health and movement because there’s a host of mental and physical benefits and unfortunately some may not have the money to do that because the past couple of years has been tough on their budgets,” she says. “BNPL allows them to get a pair of sneakers now and use it and not have to worry about the upfront cost.”
But there are costs, of course.
Merchants can pay a fee of anywhere from 1.5% to 1.7% of the purchase value (including tax), as compared to the cost of a typical debit or credit-card transaction which ranges from 1% to 3%, according to the Kansas City Federal Reserve.
But some other services may charge as much as 8% on a purchase. That sounds high but remember these are sales you might otherwise not be making. As mentioned above, customers pay no interest for the period of their loan. But if they do not pay the amount back at the end of the loan, they could be subject to significant penalties and interest, as well as potential damage to their credit.
These factors are among the reasons why some legislators in Washington are looking to better regulate BNPL services. The Consumer Financial Protection Board named several concerns about BNPL offerings, including whether the ease of them is allowing consumers to pile on more debt than they can handle. Other concerns include: Are BNPL lenders appropriately considering consumer protection laws in creating and operating their products, and how are they handling, managing, and using consumer data?
It’s important to make sure your customers are aware of these risks. That said, it’s hard to argue the value of these services, and their potential impact on the experience your business offers to a customer. Like buying a wedding gown, for example.
“Purchasing a wedding gown is a significant investment and our mission is to help brides find their dream dress and eliminate any added stress that may come with it,” says McKeever. “This includes offering a variety of flexible payment options including BNPL where we can provide customized payment options for customers on terms that work for them.”