5 min read

March 20, 2023

How Buy Now, Pay Later is Shaping Consumer Behavior

Gone are the days when consumers had to have the full amount to buy an item. Amid stiff competition, retailers have started offering various online payment methods to encourage customers to press the buy button. In an era where consumers think twice before adding their credit card balances or struggle with high inflation levels, buy now pay later (BNPL) is turning out to be the ultimate savior.

How Buy Now, Pay Later is shaping consumer behaviour-min

Table of Contents

What is Buy Now Pay Later?

Buy now, pay later is a financing solution allowing customers to purchase goods immediately and make payments in installments. In this case, the customer is only required to make an upfront payment through any available online method of payment, which acts as the first installment. After that, the remaining amount is paid over a predetermined period in installments.

If the transaction is online, there is an approval process that one must go through to verify eligibility. Once everything checks out, one can use any available payment method to make the first instalment. Once the merchant receives the first payment, they will ship the customer's order. 

In some countries, there is a physical card or virtual buy now, pay later card that people can use in retailers that don't offer the option. The purchases are charged to the account with the promise of making the remaining payment in 30 days.


BNPL Payment Options

Most BNPL services come with three basic options. The first payment option requires consumers to make total payments 30 days after the first installment. The second option requires consumers to make three to four installments to complete the purchase.

Finance It is a long-term payment plan used in larger purchases. With this option, payments are spread over 36 monthly installments. Given the duration, the payment option may incur additional charges depending on the provider.


BNPL Growing Popularity

While buying now, pay later financing solutions emerged as early as 2010, it's only now that it's becoming popular. The growing popularity has everything to do with consumers looking for ways to bypass the complexity of credit cards, high fees and APRs of the other online methods of payments.

The COVID-19 pandemic exacerbated financial stress leading to increased missed payments on credit cards and shrinking limits. Consequently, the overall usage of credit cards has declined, with most people opting for cheaper financing solutions.

The buy now, pay later continues to gain traction as it is interest-free and does not come with an added fee to the consumer. Consequently, consumers are shunning the idea of making payments with credit cards which tend to incur interest fees.

While BNPL is common with online retailers, it is also finding its way into brick-and-mortar stores. Some retailers have started offering BNPL payment options involving customers generating a QR code within the BNPL app which is scanned at the point of sale.

While many BNPL service providers charge around 5.99% in fees to retailers, most swear by the service as it has significantly impacted fueling sales.


Target Market for Buy Now Pay Later

Buy now, pay later the market was worth a few billion dollars in 2019. It has since flourished and is expected to have grown by over 1200% by 2024. The target market has always been for the younger generation, millennials and generation Z.

Since 2019 buy now pay later usage among generation Z has grown by over 600%. In addition, the rate of millennials using the financing option has more than tripled and is still growing. Generation X and baby boomers are also increasingly embracing the solution as an alternative to other online methods of payment.

BNPL growth among millennials and Generation Z points to a future where it will no longer be an alternative payment option but a preferred choice integrated into various online payment platforms.

Learn about the top payment trends in 2023 with our detailed guide. 012023-Gated-2023 Payment predictions

Why Consumers Like Buy Now Pay Later Options
Declining Credit Card Use

In the aftermath of the COVID-19 pandemic, consumers are increasingly moving away from credit cards with high-interest rates. In addition, poorly implemented rewards and limits in credit cards have exacerbated the situation forcing consumers to seek alternative payment options.

Affordable Payment Options

Buy now, pay later is an affordable financing solution as it does not come with interest rates or late fees, as with credit cards. In addition, unlike credit cards that are in the business of making money by offering credit cards, BNPL solutions came into being to encourage people to make purchases.

Retailers are increasingly offering them to entice people to purchase items rather than make money from fees.

Convenient and Flexible

Buy now, pay later is also gaining traction among people who don't carry cash and are wary of credit cards. The financing solution offers a convenient way of finalizing transactions. In addition, payment approval is instantaneous in a store that accepts the solution.

BNPL Benefits to Retailers

Retailers are embracing the buy now pay later phenomenon as they still get the full amount of the purchases. BNPL suppliers like Klarna, Affirm and Sezzle immediately transfer funds to the retailer once one of their clients uses the BNPL option. In this case, the service provider assumes credit risk for the retailer and the consumer.

Some of the other reasons why retailers are embracing buy now pay later financing solutions include:

Prospect of Attracting New Customers

The prospect of attracting new customers with BNPL is usually high. This is especially the case where customers cannot use other payment gateways to finalize transactions. However, with the prospect of only making a small upfront payment and paying the remaining in installments, a customer would be willing to shop with a retailer offering such an option.

In addition to offering free returns and dedicated support staff, buy now and pay later options lowers the entry barriers for customers giving them the flexibility to make purchases even if they have a partial amount. As a result, the option should continue as a perfect replacement for many online payment methods, given its convenience.


Better Customer Experience

Unlike other payment options, buy now pay later continues to offer the best shopping experience for the millennials and Gen Z who love shopping. In addition, the prospect of putting up a small amount upfront to own a product will always entice customers compared to other online payment methods.


Increased Sales

Buy now, pay later is also an ideal solution for the car abandonment problem. While most people log out of shopping sites because they need help to raise the full product amount and shipping fees, BNPL offers a way out. The installment option will always encourage shoppers to complete their purchases by making small upfront online payments and clearing the rest later.


Higher Customer Retention

Buy now pay later offers more flexibility to customers, therefore offering more control over what and how they can buy. Merchants offering such payment options tend to attract new customers and get more repeat visits, given the preferred payment method. Positive experiences lead to higher customer retention rates.

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Top Buy Now Pay Later Providers

While competition in the BNPL marketplace is growing daily, some brands have made a name for themselves thanks to their market reach and offerings.

1. Klarna

It is one of the biggest buy now pay later service providers, with operations in over 20 countries. The financial technology company has partnered with many businesses and retailers. It offers four repayment instalment options with one interest-free payment every two weeks. It does not charge fees, but one might incur additional costs on late and return expenses.

2. Sezzle

The American financial technology company has grown to become one of the biggest players in the space, partnering with over 40,000 brands. It allows people to split their purchase into four equal payments that can be collected over six weeks. It does not charge any interest rate or hidden fees. However, it charges late fees that can affect future payments.

3. PayPal Pay in 4

PayPal is the latest entrant into the buy now pay later spectacle offering four interest-free payments every two weeks. The pay-in-4 option is available for purchase between $30 and $1,500. However, while all payments are interest-free, PayPal charges a late fee for late payments.

4. Affirm

It is a publicly traded company that offers pay in four interest-free installments with its buy now pay later plans. Its repayment plans vary from bi-weekly to monthly, depending on the purchase size. It supports purchases of up to $17,500 with no hidden fees or interest charges and does not charge late fees.

Bottom Line

Buy now, pay later should continue to gain traction as a preferred payment method thanks to the convenience it offers the young generation gaining more purchasing power. However, as demand for credit cards and other online payment methods declines, BNPL stands to take over as a primary method of finalizing transactions.

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