March 14, 2023
By: Gareth Mankoo
The customer of today is more free and impulsive. To accommodate this personality trait, businesses are making their offerings more readily available, both from an availability and affordability perspective. The Buy Now Pay Later method of payment is created to improve the shopping experience of buyers.
The idea of purchasing something without paying its entire cost is familiar. Human beings have been dealing with loans and pledges for centuries. This payment method developed into credit societies and credit cards, which helped purchase lesser-value goods.
Today, you can step out with no money in your pocket and not a cent in your account and still purchase the latest smartphone using a credit card. Nowadays, it's even possible to apply for a mortgage loan online without leaving home. The Buy Now Pay Later strategy uses a similar benefit but with an entirely different twist.
Like credit card purchases, Buy Now Pay Later transactions do not require paying the total value for purchased items. They are not credit cards either. Instead, they are powered by credit specialists who offer this as a benefit with little to no interest fees charged.
So, even if you do not possess a credit card, you can still purchase a highly-valued item and pay for it later in smaller, frequent installments. Because of the growing popularity of this business strategy, companies can break even by selling goods online in higher quantities.
Credit cards have earned a poor reputation because of hidden bill charges and challenging credit limits. Getting a credit card just for a single purchase makes no logical sense, especially for those opposed to frequent use.
So, buyers are turning to brands and credit experts who offer this invaluable service at the point of sale. Buy Now Pay Later works both in physical and online purchases.
This trend is more prevalent among younger individuals who do not have credit cards or are too young to apply for them. It is supported by reputable names in the accessible-finance market, including Shopify, PayPal, and Afterpay.
It is a valuable stepping stone for a youngster to realize their financial stability and spending abilities. As a result, Buy Now Pay Later has become popular in online retail, where the youth prefer making purchase decisions.
1. A business identifies the products it would like to sell at scale and offers a Buy Now Pay Later benefit to customers who show purchase interest.
2. Customers visit the online stores of the business, populate their virtual shopping carts and proceed to checkout.
3. At checkout, the customer is prompted to choose a payment option, which includes Cash, Credit Cards, Debit Cards, or Buy Now Pay Later.
4. The buyer then runs a credit check to identify the customer using their Social Security Number and complete address. This check is done to insulate the business from any kind of repayment fraud.
5. This credit check does not get reported to the credit bureau.
6. Once the vendor is convinced of the buyer’s eligibility and authenticity, it charges a fee between 2% and 8% to the retailer.
7. If a customer chooses to pay back the entire amount in a shorter period, the lender approves an interest-free payment scheme (in most cases).
8. If a customer chooses a more relaxed and prolonged payment period, the lender charges a percentage of interest on the purchase made, which is communicated clearly to them.
The Buy Now Pay Later strategy sounds convenient and exciting as it empowers your customers to make more impulse purchases, even in financially strained times. But there must be a method to the madness to gain maximum sales from the campaign.
Here are eight best practices to implement this clever strategy without risking too much.
Before you choose any payment strategy for your customers, a key deciding factor is your target audience. It helps to understand your business offering better.
If it is a product that can fly off the shelves without getting your customers to dig deeper into their pockets, then payment benefits are unnecessary. If you sell a big-ticket item, give your customers payment flexibility.
Next, understand the type of customer you are targeting. Are they the kind who whip out a checkbook at the drop of a hat, or do they require tedious planning before making purchases?
Draw out the demographic and psychographic analysis of your customer. If your customers use credit cards often, they may need to be taught about the benefits of other Buy Now Pay Later strategies, and this must come through in the communication you put out.
Once you understand your target customer better, it’s time to shift your focus toward the kind of Buy Now Pay Later benefit you want to offer. There are different sub-strategies you can employ:
A split payment benefit will suit your business and customers for products and services that cost only a few hundred dollars. The payment sum is smaller, and defaulting will not impact your business as heavily.
Loans are for more oversized purchase-value products. Loans could include interest rates and may affect your customer’s credit score. The disadvantages of loans for customers are balanced out by the higher value product that they can benefit from
Installment payments are prevalent in both split payments and loans. The amount to be paid in installments is determined by the interest rate you set and the tenure the customer chooses to pay back.
Choosing a trustworthy Buy Now Pay Later provider is essential to executing a successful strategy without hassles. Popular tools like PayPal and Klarna help you split payments into easy installments for your customers.
PayPal is among the most reputable providers with whom you can bank. It integrates seamlessly with the PayPal wallet to simplify a payment. Customers also make payment decisions when they trust the provider’s name. Working with PayPal can not improve your sales options, but it can boost the confidence of your customers to purchase from you.
Most Buy Now Pay Later providers charge a percentage fee for the transaction. It will be billed directly to your business. The usual sum ranges between 2% and 8%. The model emulates credit card payment models to a large extent.
Flexible payment options can go a long way in encouraging customers to purchase from your website, app, or shopping portal.
Sometimes, the nature of the product is such that you would depend entirely on your pricing strategy to gain an advantage over your competition. Hence, showcase your Buy Now Pay Later policies uniquely when you market your products.
For businesses that deal with high-value products, the chance of a customer dropping out of your conversion funnel is higher if they encounter high prices. By advertising the payment option you offer customers well in advance, you can avoid customers leaving the path you have created for them.
If you are still determining when to mention your Buy Now Pay Later strategy to customers, run a test marketing campaign at a smaller level. You will notice specific points where customers drop off and plug in by introducing your payment options.
Buy Now Pay Later options always come across as a value-add that your business offers. There’s no better time to offer customers something extra than a seasonal sale. Also, customers tend to make more purchase decisions during seasonal sales.
Customers will have an easier decision when encountering an ad from your brand that promotes a product they need and an exclusive pricing strategy.
Ensure your product or service is appropriate for marketing during a specific season. You do not want to give a special discount on faux woolen jackets in the heat of summer, do you?
Several brands report that their customers drop out at the checkout page. The reason for this is simple: it’s here where the actual transaction is to be made. If customers reach this stage of their purchase journey and encounter a flexible payment option to leverage Buy Now Pay Later, they get encouraged to make the purchase.
It also gives them more confidence in the brand because it comes across as more caring for them and their affordability. This is a big reason why checkout page optimization is incredibly important. If customers don’t actually see the ‘Buy Now, Pay Later’ option because the UI is so cluttered, it might as well not be there at all.
To ensure customers do not miss this vital information at checkout, create a prominent call-to-action on the check-out page that mentions the Buy Now Pay Later benefit customers can receive.
Customers are always protected if you are willing to go the extra mile to retain their patronage. It’s a well-known fact price significantly contributes to customers dropping out of any purchase journey. Modern marketing techniques and platforms give advertisers the power to re-target customers who have abandoned their carts.
By introducing a Buy Now Pay Later benefit to customers who have made it to the shopping cart without checking out, you can change how they react to your communication. You can carry out such targeting intelligently since you know the specifics of the product in the cart. This intelligence will help you optimize your pricing strategy for the product.
Once you execute your pricing strategy, you must nurture it and keep improving. Tracking the success of your pricing strategy at regular, short intervals is essential.
When pricing strategies do not work and are left unattended for extended periods, a business can record phenomenal losses. Having identified your customers, their preferences, and places where they can be wooed by attractive pricing, you must better understand what would attract a purchase.
The tweaks in communication may involve adjustments in your pricing strategy and the design and copy you use. Test your Buy Now Pay Later ads to see if the message registers with users. How you present concepts to customers in a highly distracting world can make all the difference.
Now that you better understand setting up attractive payment strategies to improve customer experiences, you must focus on picking the best partner. There are several providers available to help you get started on your journey. Here are five popular names.
Affirm is arguably the biggest name in the Buy Now Pay Later circuit, catering to big boys like Amazon and Target. The provider excels in enabling short-term loans (four payments two weeks apart each). No charges are levied for this service, and you will have to pay no fees.
Long-term loans involve interest-based payments and range from 10% to 30% annually. There are no setup fees for these payment structures. Customers who prefer to purchase from retailers who do not use Affirm can access the service benefits via a virtual card.
Owned by a US-based company, Block, Afterpay is a massive player in the Buy Now Pay Later market. Over 100,000 retailers work with Afterpay because of its unique intelligent credit tool.
This tool has gained popularity among retailers as it creates spending limits for shoppers. The limits are decided based on the personal credit history of each shopper. These limits can save retailers from the hassle of dealing with defaulters.
Even customers can now shop with more freedom, knowing that their paying for their purchases is well within their means. The virtual service card of Afterpay is popular and used widely.
Shoppers receive consistent reminders to may payments and are penalized if they delay payments. The company charges interest rates of 10% to 30% annually, depending on the borrower's credit strength.
Swedish-based financial company, Klarna, has been around since 2005. With over 85 million customers, the company has reached a global network of businesses and partners who benefit from the seamless service and support.
It can run a soft or hard credit check on customers, depending on the kind of transaction being attempted. Klarna has invented its borrowing framework called Purchase Power, which helps it measure the borrowing strength of each customer.
It describes Purchase Power as “an estimated amount based on factors such as your payment history with Klarna and your outstanding balance.” Unlike a bank dealing with mortgage loans, it is a fair and reliable borrowing metric. Interest rates can go up to 25%.
Among payment gateways, PayPal is the most trusted name. It can be used for payments across retail channels and as a gateway between two individuals. The lending service offered by PayPay has gained recognition over time. The “Pay in 4” service breaks all transactions into four time-based payments.
A significant limitation of shopping with PayPal is that the Pay in 4 services is limited only to purchases between $30 and $1,500. A significant advantage of working with PayPal is its 30-million-wide network of merchant partners. The likelihood of finding a merchant that supports PayPal is significantly higher. The interest rate revolves around 24% annually.
Sezzle offers customers the incredible advantage of pushing back their payment due dates by up to two weeks. It is focused on financially empowering the next generation. The con is that it requires a 25% down payment on purchases. The platform charges no interest on most of the loans.
Sezzle has already partnered with 44,000 retailers, most of which are smaller. The company is resolved to continue innovating its offerings to match the needs of a growing, younger demographic of spenders.
What are some commonly asked questions about the Buy Now Pay Later strategy? Get your questions answered with these three FAQs.
If you're looking for a low-interest loan with a longer repayment period, Affirm is a good option. Lending terms for POS loans can be as long as 60 months, and the maximum loan amount is $25,000.
Affirm stands out among other providers of Buy Now Pay Later services because it gives customers access to long-term financing plans with zero percent interest.
It depends. Lenders' willingness to extend Buy Now Pay Later to customers with poor credit scores ultimately comes down to their comfort level with taking on that customer's level of risk.
While some financial institutions have no problem working with borrowers who have less-than-perfect credit, others, especially highly regulated Tier One lenders (like banks), are more likely to reject those borrowers.
Most likely, no. Customers can spread the cost of their Buy Now Pay Later purchases over four equal payments. Applying for many Buy Now Pay Later services will not have any negative effect on your credit score because they do not require a hard credit check to qualify you.
While Buy Now Pay Later brings customers a world of benefits, it also gives businesses the unique opportunity to change how customers think of their business and services. Even larger retailers with big-ticket items such as expensive equipment and machinery can now support broader ecosystems by offering a cost-benefit.
Smaller businesses can make their products seem even more palatable for a customer base that is financially strained and looking for any help they can get to realize their dreams.
Use this strategy judiciously on your product portfolio, knowing full well that it may only sometimes apply to your entire range of offerings. Test, monitor, and improvise; success will always be within your grasp.