How letting customers Buy Now and Pay Later can help merchants grow their business
With the increasing focus on Buy Now, Pay Later payment, merchants should consider carefully what role this option should play in their payment strategy. To gain the optimal advantage, the entire purchase journey should be adapted to leverage the strengths of BNPL.
Although it is not a new concept, Buy Now, Pay Later (BNPL) has been gaining increasing attention lately and is currently one of the hottest topics among merchants across the world.
This may also cause German merchants to wonder whether BNPL should play a bigger role in their payment strategy. Based on Nets data and local market insights, there is a clear trend indicating this should be the case. In a study of the top 500 e-commerce companies in Germany (Raw data from EHI Study Online Payment Top 500, 2020), the data shows that the web shops offering BNPL outgrew those that did not by 46 %.
When discussing BNPL, it is important to keep in mind that the term is commonly used to cover multiple payment models. This includes open invoice (Kauf auf Rechnung), where the consumer typically has 30 days to pay after receiving their purchases as well as payment in multiple installments. In the UK and US, installments are the dominant form of BNPL, but in the DACH region, open invoice is king.
For historical and cultural reasons, BNPL already has a high adaptation in the DACH region. Data from the Nets E-Com Report DACH Update 2020/21 shows that 37 % of German consumers use open invoice, and 6 % have paid in installments when shopping online. Part of the reason for this is undoubtedly the high level of trust this payment method has earned in the DACH region, with 82 % of Germany consumers, 78 % of Austrian consumers and 84 % of Swiss consumers saying they trust open invoice very much. For additional details on the consumer preferences in the DACH region, refer to figure 1.
Figure 1: DACH Buy Now, Pay Later preferences
In the Nets E-Com Report DACH Update 2020/21, respondents have stated their preference for different payment methods. Here are the answers for BNPL-related payment options. For other options, please see the latest edition of the Nets E-Com Report.
Why is BNPL so popular with German consumers?
German consumers have different motivations for preferring BNPL. For many consumers, BNPL lets them manage their finances and delay payment until they are certain that they are satisfied with their purchase. In the Nets E-Com Report DACH Update 2020/21, German respondents say they prefer invoice payment because it is secure (58 %), simple (34 %) and makes it possible to delay payment (32 %).
In this country, open invoice is frequently used in online clothes and shoes shopping, where it allows consumers to receive and try the goods before paying. This way, the consumers can return unwanted products and pay only for the things they decide to keep, without having to deal with the hassle of getting a refund. This also reduces the risk for the consumer and gives them full control of their payment process, which builds their feeling of trust and control.
For larger purchases, such as furniture or expensive electronics or appliances, installment payments allow the customer to receive and begin using the products without having to spend time saving for it or taking out a loan.
What merchants should consider when developing a BNPL strategy
As we can see, a business which provides BNPL options like open invoice and installment payment has a strong likelihood of resonating well with consumers. However, in order to maximize the potential for growth and taking full advantage of BNPL, there are several important considerations that merchants should make when including BNPL in their payment strategy.
1. Design the buyer’s journey for BNPL
Since BNPL attracts consumers who would not normally consider making a purchase due to uncertainty or a high price, merchants should make sure to include the option to buy now and pay later in their marketing and point of sale material to increase conversions.
BNPL requires merchants to establish the identity of their customers and evaluate their credit rating. After all, neither the business nor the consumers have an interest in sales where the customer overstretches their financial limits. These steps should happen with as little friction as possible, in order to compete with faster and simpler payment methods such as cash or credit card.
Fortunately, one of the defining aspects of BNPL is that consumers can make a purchase using the data the merchant will need anyway to process the order, such as email, billing and shipping address and phone number. The only additional data element is the date of birth. This makes online shopping very easy as consumers do not have to remember login credentials (e.g. Paypal), PAN and CVV (card payments), IBAN (PIS services and direct debit) etc.
In addition, many modern BNPL payment solutions use AI assisted credit evaluation, which is able to rapidly process data from a large number of sources such as Schufa and combine it with info about customer behavior to detect fraud. This makes the checkout process close to one-click while still keeping the risk low.
2. Use BNPL to build a stronger relationship with your customers
With this exchange of information and customer data, BNPL provides an opportunity to build a closer relationship with the customer. Once a credit evaluation is approved, the data can be saved to increase the likelihood of repeat business. It also makes it vital for merchants to build trust with the customer. Some ways to do this is by creating transparency about all costs and conditions, providing communication channels for inquiries and by not asking for irrelevant personal data.
Care should also be taken in the post-purchase communication and customer support. For instance, the tonality of reminders to customers, who miss a payment deadline should be carefully crafted to build a positive interaction and the customer support department should be trained to assist with common issues regarding the BNPL process. A benchmark study shows that on average, 40 % of all customer service interactions relate to payment issues (source: “Customer Service in the digital age”, Pidas), so ensuring a high level of expertise among customer support staff is vital.
This is especially important to consider when using a third-party BNPL payment provider. In this case, the merchant is essentially selling the invoice to the BNPL provider, who will often take over communication with the customer about payment from that point. This makes it vital for merchants to partner with a payment provider that share their values and approach to customer service, since mismanaged communication is likely to reflect poorly on the merchant and their brand in the mind of the customer.
3. Choose the right BNPL solution
When including BNPL as a payment option, merchants must decide on the right solution and how best to integrate BNPL in their financial systems. Adapting an existing payment system to accommodate BNPL, conducting credit ratings, managing fraud risk and ensuring regulatory compliance is an extremely complex task and thus typically only an option for the largest corporations. This makes a third-party solution the most realistic choice for most merchants.
A third-party payment provider usually charges the merchant a fee for each transaction in exchange for handling the credit evaluation and payment process. This carries the added benefit for the merchant that the money for the purchase is transferred immediately, so the third-party provider assumes all the risk in case the customer is unable or unwilling to pay.
Some third-party BNPL solutions are available both in a branded version or as white label, which integrate seamlessly with the merchant’s design. Research conducted by Bilendi on behalf of BNPL provider RatePay, part of the Nets Group, shows that the white label approach supports better conversions. 48 % of customers selected the white label BNPL option versus 31 % choosing BNPL when presented with a branded third-party payment option (see figure 2 for details).
Figure 2: White label vs third-party branded BNPL
Study shows that white-label BNPL solutions increases conversions and reduces abandoned purchases. The percentages reflect which option users selected. White label invoice was preferred by 48 percent of the participants while only 31 percent preferred branded open invoice.
How merchants can use BNPL to grow their business
German merchants have an especially strong case for providing BNPL as part of a complete payment suite for both online and physical purchases. The popularity of the open invoice model with consumers in this country means that businesses that do not provide this option risk having a significant portion of their potential customers go elsewhere. So, why not take the opportunity to build stronger customer loyalty by offering a payment method consumers find secure, simple and flexible?
Want further insights about how Buy Now, Pay Later and other trends affect your business?
In the Nets E-Com Report DACH 2020 Nets E-Com Report DACH 2020 and the recent Nets Update E-Com Report DACH 2020/21 you can find an in-depth insight on how market trends like the popularity of Buy Now, Pay Later can provide additional growth opportunities.
By Patrick Höijer
Board member of Concardis GmbH and Chief Commercial Officer for Large & Key Account (LAKA), Nets Merchant Services