Loyalty Program : Buy Now, Pay Later

A new season has come and you are raring to shop for a new line of clothes launched. Or you want to experience a new cycling adventure outdoors and you are eyeing that expensive but amazing new bicycle that costs $1600+. But you don’t want to break the bank.

Buy Now, Pay Later (BNPL) is a loyalty program that has become very popular in recent times. BNPL is a form of installment plan where customers pay in installments for a product that they have purchased. The installments are structured and paid over a period of predetermined months. Typically installments are free of interest and fees so long as customers pay the installments on time. Interest may be for larger amounts and/or when installments are spread over a long period of time.

Paying in installments has existed since the 1840s when manufacturers of furniture, pianos, or farm equipment tried to make their products attractive and attainable. It is still relevant today and BNPL is another form of financing. The relevance of BNPL was proved for Peloton and its expensive products and services. Approximately 30% of Affirm’s (a leading BNPL financing company) first-quarter 2021 revenue was largely due to Peloton sales. According to the Financial Conduct Authority, 25% of BNPL consumers are users between 18 and 24 years old, and half are 25 to 36 years old, namely, Gen Z and millennials.

For customers, BNPLs are a form of the subscription-based plan which are more controllable and transparent than credit cards. With an upfront structured payment plan, there is less chance of encountering hidden fees, exhaustive credit checks, or falling prey to complex written agreements. Approximately 57% of customers were found to be more willing to make purchases during the 2020 holiday season, according to a study by PYMNTS or Paypal. BNPL is also preferred by consumers who do not have access to credit or want to purchase credit cards to cover their shopping.

For e-commerce sellers, BNPLs offer higher sales conversion, higher customer retention, and an increase in trust with customers by allowing smaller payments over longer periods. “RBC Capital Markets estimates these point-of-sale loans increase retail conversion rates 20% to 30%, and lift the average ticket size between 30% and 50%.” Although BNPL constitutes only 2% of the global e-commerce payments, it is quickly growing and expected to reach $181 billion by this year.

BNPL services come through apps or extensions on e-commerce platforms. The leading BNPL company is Stockholm-based Klarna which has 90 million users. The next largest competitors are Affirm and Afterpay, which have millions of customers, too. Banks, credit card companies, and fintech companies are heating up the BNPL market. In August 2021, Square Inc., a mobile payment company, agreed to acquire Afterpay for $29 billion.

BNPL companies are attracting consumers with their rewards programs. To take on the credit card industry, their rewards programs now offer loyalty points, discounts, Airmiles and other offers. For example, Klarna launched a rewards program in 2021 called Vibe, where consumers can earn vibes when they make payments on time. Vibes reset every year and are only credited after consumers join the program. Brands such as Amazon, Adidas, Best Buy, Foot Locker, H&M, Macy's, Starbucks, and Walmart are participating in this program and consumers can also redeem points as gift cards for these brands and more.

Although many e-commerce sellers can resolve to let BNPL companies offer rewards and incentives for shopping, many of them are combining with their own loyalty programs. For example, an online store may offer a discount to incentivize a customer to use Klarna and the customer may further benefit from Klarna’s rewards program. BNPL companies are still at a nascent stage and yet to incorporate cashback into their rewards program, so e-commerce sellers need to plan their consumer loyalty strategy with BNPL as a key component.

As BNPL grows, it is considered to promote reckless consumerism just like the credit card industry. “Research by Equifax estimates buy now pay later users to spend 51% more on clothes each month than online shoppers who pay upfront.” The industry is unregulated and therefore does not have access to information on consumers’ credit lines. To encourage responsible spending, BNPL companies work in a number of ways such as starting with lower spending amounts for consumers and building budget features that consumers can keep track of. For the e-commerce business, it needs to consider the BNPL partner for its technology, features, rewards program, and brand reputation so it resonates with the business’ branding.

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