‘Consumer credit where it is due!’ – Analysing the impact of Buy-now, Pay-later (BNPL) and whether its online success can be replicated in store

If you’ve ever found yourself sitting at home on a Friday night, trying to find the perfect pair of shoes online, there’s a chance you’ve come across Buy-now, Pay-later (‘BNPL’). BNPL allows consumers to pay for goods in interest-free installments over 90 days or through standard credit (payment terms up to 48 months). Also, it enables the customer to try a product for up to 30 days before a payment is taken. Currently, there are over 7 million BNPL users in the UK and numerous online retailers adopting it.

In this blog, we focus on the interest-free product, and whether BNPL’s online success can be replicated in an offline capacity, especially against a retail backdrop facing several structural and cyclical headwinds. In spite of the benefits, we see two pivotal issues:

  1. Does the adoption of BNPL drive a sustainable long-run ROI?
  2. Are there moral questions to be raised, as consumer debt can increase significantly with the adoption of BNPL?

BNPL’s success can be attributed to its appeal to multiple demographics from teenagers to adults; a driver of its success is BNPL allows consumers to try a product before payment is taken. An individual shopping for clothes or footwear and is unsure about sizing/style can use BNPL’s ‘Try before you Buy’ to order multiple items, and return anything that doesn’t fit or doesn’t suit the individual, usually at the cost of the retailer. The three leading providers are Klarna (largest UK market share), ClearPay and LayBuy. The provider, generally, takes on the risk; while, the merchant, generally, receives all the money upfront and pays a small fee.

Originating in Australia in 2014, BNPL was introduced by Afterpay exclusively for online retailers. By early 2019, Afterpay had rolled out the BNPL in 15,000 physical sites across Australia, with 25% of new customers acquired using it in-store, with the in-store offering generating c.20% of Afterpay’s revenue. If BNPL’s adoption in physical stores in the UK can have a similar effect like the one seen in Australia, alongside current wage inflation trends that’ll drive an increase in spending, it might benefit a number of brick-and-mortar retailers. This will give them the ability to provide flexible payment options, making customer acquisition an easier proposition and improving conversion rates by targeting window shoppers. Klarna, like Afterpay, gives consumers the option to use BNPL in-store, and by digitizing the transaction, a purchase can be done almost instantly and allow for various credit options. In providing this flexibility, in-store BNPL products have the capability to drive customer loyalty, as well as increase spending limits and average basket size.

Despite BNPL’s positive effect on certain retailers, it can lead individuals to get sucked into a ‘debt trap’ by encouraging multiple purchases a month; this can push debt burdens beyond a tolerable limit, as a result. Additionally, as the products are interest-free, they remain outside the remit of the FCA and are unregulated. BNPL providers rarely highlight the consequences of missed payments and use language that attempts to evoke an emotional response before buying goods. This underscores the importance of safeguarding technology and identifying vulnerable customers sooner, as to stop debt levels growing silently. Although Klarna has stated that if payments are missed, it will send out various alerts, with the possibility of extending the payment terms at no additional cost.

From the merchant’s perspective, the ‘Try before you Buy’ offering can result in a mass amounts of returns, with 40% of UK online retailers detailing a marked increase in intentional returns after its introduction. Given the merchant takes a margin hit and often bears the cost of the return, adopting the product can have a compounding negative effect as return rates will increase alongside sales growth. This makes analysing whether returns are based on style and fit, or ‘Try before you Buy’ driven returns challenging. However, some online retailers are adopting a framework to manage the returns, such as allowing for only three returns a month. The repercussions of leveraging this product in-store might not have the same effect compared to online peers, as customers will still use fitting rooms and returns can be rejected if products have clear signs of prolonged use.

With consumer spending migrating online, BNPL products are giving physical retailers a lifeline. It provides a level playing field and offers consumers an opportunity to fuel their spending habits and try out various products before paying for them. Having just been introduced in-store, and without hard data, it is hard to measure the exact effect of BNPL products on sales. It remains to be seen whether the adoption will drive a retail revival. What is apparent, though, is its popularity amongst consumers and its unique capability to redefine the psychology of buying goods. Notwithstanding the controversies, providers are taking positive steps to ensure that customers are aware of the repercussions of missing a payment and identifying vulnerable customers early on in the buying process. To this end, if the effect is similar to the one noted by Gymshark, which quoted a 33% increase in basket size after introducing BNPL, it could prove to be the growth catalyst merchants have been looking out for.

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