If your business is online, a big chunk of your target audience is likely made up of Millennials. Now that they’re (sort of) all grown up, this generation finally has money to spend. But beware: the way they spend is very different from that of their Gen-X predecessors.
To capture that growth, it’s vital that retailers understand how to give Millennials the shopping and payment options they want.
Let’s take a look at the global market in general — and the Australian market in particular, for reasons that we’ll explain — to see why offering interest-free, buy now pay later (BNPL) installments and other payment solutions are key to making your online offerings relevant to Millennials.
In fact, no-fee products and services might just mean the end of traditional credit cards.
Pay Later Defined
“Pay Later,” sometimes called “Shop Now, Pay Later,” is a solution for point-of-sale financing. Retailers offering a Pay Later solution enable customers to choose a financing plan and pay in installments instead of having to pay the entire cost up-front.
Financial tech (or “fintech”) emerged strong in the last several years looking to address the pain points around financing — namely, complexity and credit cards with high fees and APRs.
Today’s fintech Pay Later solutions allow shoppers to purchase their product and pay in a predetermined number of installments, over time. These solutions are often offered to customers with no (or extremely low) interest, meaning no additional cost to the customer.
How Does Pay Later Work?
At checkout, Klarna shoppers have the option to receive their product right away, but to pay for it either in full after a 30-day period or in smaller installments over time.
They typically make three or four equally spaced installments which are taken directly from their payment card. Either way, there are no extra fees or interest to pay, provided they pay on time.
Participating merchants pay the provider 2–6% commission plus a fixed fee for every transaction.
1. “Buy Now, Pay Later” payment options.
Though the exact details vary by country, Klarna offers customers who buy through its platform three basic options:
- Pay Later in full after 30 days.
- Pay Later Installments into 3 or 4 equal, interest-free installments.
- Finance It, splitting the cost of bigger purchases into as many as 36 monthly payments. Interest charges can apply.
2. The Pay Later checkout experience.
Let’s take a look at the buy now, pay later experience from the customer’s perspective.
They find an item they like, add it to their basket and click ‘checkout.’ So far, so normal. But here’s where things get interesting.
Alongside traditional payment options like credit/debit card and PayPal, they’ll see a ‘Pay with Klarna’ option. Alongside fields to enter their card details, shoppers are presented with the option to buy now, pay later with Klarna. Buy now, pay later options open up consumer purchase flexibility through several flexible payment options.
3. Pay Later at the point of sale.
In some countries, customers can even order a physical or virtual Klarna card to pay for anything, anywhere. This allows them to buy now and pay later even from retailers who do not normally offer this option. Purchases are charged to their account with the option to pay immediately in 30 days or via financing.
Though most Klarna transactions are with online retailers, traditional brick-and-mortar retailers can also offer Klarna payment options. This usually involves the customer generating a QR code in the Klarna app, which is scanned at the point of sale. The retailer gets the credit from Klarna, and the customer gets to pay later.
Being able to choose how and when they pay, without accruing interest, increases spending power and allows customers to determine their own financial schedule.
Pay Later Solution: Is it the End of the Credit Card Era?
Credit cards have long been a favorite source for easy-access, unsecured credit. But what we’re seeing in Australia is that excessive demands for upfront personal information before credit approval, short interest-free periods, and extremely high rates are proving to be a turnoff for younger consumers.
In just one month, between August and September 2019, the number of active credit cards in Australia fell by 4.1%. The total number of active cards is now at the lowest it’s been in nearly a decade.
Customers who are currently sticking with credit cards are becoming more savvy with their spending, too: balances accruing interest fell by almost AUD 2bn in 2019.
By contrast, buy now, pay later usage is up. Findings from the Roy Morgan ‘Digital Payment Solutions Currency Report’ September 2019 show that 1.95 million Aussies (almost 8% of the population) used a buy now, pay later service in the previous 12 months, up from just 1.38 million in September 2018.
What’s more, one in every two BNPL users stopped using their credit cards altogether in 2019, according to The Reserve Bank of Australia’s (RBA) Credit and Charge Card data for December 2019.
1. Pay later usage in Australia is significant.
It turns out Australia is a full-blown testbed for this booming trend. National regulator ASIC identified six BNPL players in the market last year, and they have just been joined by Klarna, Europe’s highest valued non-listed fintech.
While pay later solutions are successfully catching on in the U.S., Australian consumers have already made them a significant part of their shopping ecosystem. A report from Mozo.com.au says as many as 30% of Australian adults have one or more buy now, pay later accounts. That’s about 5.8 million users in the country.
Mozo Director Kirsty Lamont also reports that 25% of pay later solution users cancel their credit card, and another 23% say they at least stopped using it.
On the same note, ME Banks chief executive Jamie McPhee said in a recent interview that the arrival of ‘buy now, pay later’ has fundamentally disrupted the traditional payment market. And this wasn’t just idle speculation: the bank has decided to stop investing in its new credit card platform.
“I have two daughters, and I don’t think either of them will ever own a credit card or a traditional credit account when they start shopping for themselves. They will fund their everyday purchases with a debit card and everything else using their buy now, pay later account,” he said.
He continued: “This represents a truly fundamental economic shift.”
2. The pay later trend is here in the U.S., too.
The buy now, pay later phenomenon isn’t just limited to Australia; it’s happening in the U.S., too.
A survey in 2016 by Princeton Survey Research Associates International showed that 67% of American Millennials (ages 18–29) didn’t own, let alone carry, a credit card. This is up from 63% of the same age group two years prior.
In a recent video, NYU Stern School of Business Professor Scott Galloway explains in depth how and why U.S. retailers are making use of new flexible payment solutions offered by buy now, pay later companies. It’s because, in part, it enables them to make larger purchases, even if they don’t have that amount of cash on hand.
Besides, having to make four payments of $20 feels a lot less intimidating than having $80 sitting on your card with interest accruing all the time.
3. Millennials prefer a pay later option.
Millennials today are doing more of their shopping online. In 2019 they made 60% of their purchases online, up from 47% in 2017. But this group is wary of the traditional credit card industry, is more protective of their personal information, and has, it seems, limited patience with clunky user interfaces.
One benefit of a pay later option is that it circumvents many of the biggest downsides of using a credit card — like high interest rates, annual fees, and confusing terms of service.
Some say growing up in the shadow of the Global Financial Crisis is partly responsible for Millennials’ new outlook on money, specifically credit. General Manager for APAC, Worldpay Merchant Solutions says this is behind the trend toward alternative payments and away from the traditional credit card.
In short, buy now, pay later is THE preferred payment method of Millennials, that infamous yet hard-to-reach consumer group born roughly between 1980 and 2000.
As is Daniel Jensen, Vice President of Product at Klarna, explains, BNPL is in tune with how millennial shoppers want to buy:
“The younger generation want this kind of simple and flexible payment solution that suits their financial situation without forcing them into one-sided credit agreements with unfair interest rates,” he said.
“Being able to offer a consumer-friendly payment method that provides an easy, short-term, no-interest solution – without requiring a formal credit agreement with these customers – is great for your business.”
How Using BNPL Options Benefits Retailers
Retailers want to get paid right away, even if their customers want to spread the cost. A BNPL supplier like Klarna will transfer funds to the retailer immediately upon a customer’s purchase.
Klarna’s smart algorithms mean it can assume credit risk for both the retailer — paying them even if the consumer defaults — and the consumer. Whatever happens, everyone is protected.
“Klarna helps merchants enjoy a more integrated experience overall,” said Michael Yee, product manager for Klarna shopping. “It offers better conversion rates, higher retention rates, and significantly lower administration costs.”
Here are some of the specific benefits retailers will enjoy by implementing a BNPL option.
1. Better customer experience.
While it’s absolutely true that Millennials love shopping, browsing and uncomplicated delivery, they also demand and expect a superb shopping experience they want to use over and over again.
If you want to get Millennials and keep them as customers, the first thing you need to do is build a platform which is up to the task. That has to be right before you even start thinking about reward programs, loyalty schemes, or any of the other ‘nice to haves.’
2. Increased sales.
Whether it’s the shock of such a big chunk of change leaving your bank account, or the prospect of high interest rates on your credit card, it can be difficult to pull the trigger on the purchase of a big-ticket item. That, in part, is why BNPL is having a positive impact on conversion rates.
The Baymard Institute found that the second most commonly cited reason for abandoned carts was the price. Offering installment options can reduce the sticker shock significantly, encouraging shoppers to complete their purchase. According to Scott Galloway’s data, it can even increase average basket sizes by 20–30%.
3. Stronger customer loyalty.
The ability to try before you buy has long been a problem for online retailers: people like to feel the fabric between their fingers and see if the shoes fit before they commit. Buy now, pay later specialists like Klarna offer a great chance to make this work in the online space.
Imagine a young woman looking for something to wear to an upcoming party. Instead of seeing an outfit, buying it, rejecting it and then having to send it back to get a refund, BNPL allows her to order as many as she likes, safe in the knowledge she doesn’t have to pay for anything she doesn’t like. Even the returns are free. This increases average order value, and means online retailers are fighting on a level playing field with the changing room providers on the high street.
It’s easy to see offering free returns as a cost sink, but they are becoming an essential business tool. According to a UPS study, 66% of customers say they check return policies before making a purchase. And, as mentioned earlier, more than half of online shoppers will steer clear of stores with a strict returns policy.
Businesses that see returns as a chance to build better relationships with their customers and, ultimately, sell more stuff, are better placed to succeed.
4. Higher customer lifetime value (LTV).
BNPL is ultimately a win for consumers in that it gives them more flexibility and more control of what and how they buy. Merchants attract new Millennial and Gen Z customers, get more repeat visits, and convert higher average basket sizes.
Since a positive purchase experience is so important to customer retention, these positive experiences mean they’ll come back again and again. In addition, once they know you offer a BNPL option, they’ll come back to you for their next big ticket item instead of working to find another store they trust that offers it.
Retailers’ Experience with BNPL
The best way to show how BNPL works for retailers is to hear it straight from the horse’s mouth.
1. Big-ticket audio equipment.
Take recording studio gear retailer ZenPro, which is seeing new success from BigCommerce’s Klarna integration. It allows customers to pay with low interest financing for the brand’s big ticket items — and the firm has seen that orders made with Klarna have a 100% higher AOV.
“As a BigCommerce Insider, I saw Klarna being added as a new payment option just as they were entering the U.S. market,” said ZenPro Audio’s owner and founder Warren Dent. “Once I saw Klarna’s rates, I was floored at how competitive the merchant fees were as compared to other cart-based credit options I was considering.
“Integration was simple. We use their financing option, and once I advertised this on our site and in ads, I started seeing orders paid for with Klarna roll in.”
Dent said that orders facilitated by buy now, pay later are 100% higher in value versus other payment methods.
“That advantage has helped put us on a competing level with enormous big-box sellers who offer traditional instant credit.”
2. Home goods and furnishings.
Offering Klarna to support the purchase of big ticket items has also been a success for home sauna supplier JNH Lifestyles.
Source: JNH Lifestyles
Closer to home, Aussie online furniture retailer Kardiel is also seeing Klarna help people finance purchases of their Scandiavian-inspired pieces as confirmed by Deputy Vice President Debbie Kilmer.
“One benefit we’ve found with Klarna’s buy now, pay later offer is that it is so easy for our customers to apply and receive confirmation back concerning approval and terms offered. Other credit processes we’ve seen are lengthy for the client and complicated for our team to initiate. The easy use of this system for everyone involved is such a benefit.”
3. Sports and outdoors.
As the summer approaches Sixgill Fishing products and trail bike supplier Orion Powersports are also in on the act. By helping consumers spread the cost of their summer purchases across the year, they help make it easier for people to buy.
Source: Orion Powersports
In addition to the benefits of offering BNPL financing, these BigCommerce partners also find themselves featured on Klarna’s store directory and other marketing materials, making them easy to find by people who have already used Klarna — and are more likely to use it again.
Buy Now Pay Later In Ecommerce
Merchants all over the world are giving their shoppers the option to pay over time. Here are a few more BigCommerce customers making Klarna’s BNPL option work for them.
UK clothing retailer Yumi offers shoppers the opportunity to spread their payments over several months by using Klarna. Retailers decide how to promote the availability of Klarna — Yumi chose to include a small banner underneath the quantity selection.
2. Stormy Kromer.
Stormy Kromer, headquartered in Michigan, leverages Klarna also, putting the BNPL provider’s banner just underneath the Add to Cart button.
Source: Stormy Kromer
Bridal shop Revelry, based in Austin, Texas, uses Klarna to help brides and their wedding parties leverage BNPL so they can have the dresses they want without the hassle of paying all at once. They chose to put the Klarna notice just underneath the product name and price.
Millennials are now all bonafide adults — and Gen Z isn’t far behind them, as some of their older members are coming into their own purchasing power. Both of these generations are known for their desire for flexibility. And having seen the last great recession, it’s no wonder they’re wary of the promises of traditional credit.
Enter buy now, pay later options to disrupt the payments industry, stealing customers away from major credit card companies and enabling them to spread big purchase payments over time — without the uncomfortable interest fee accrual.
Whether this trend will continue once Millennials attain even stronger purchasing power remains to be seen, but at least for now, buy now, pay later options are benefiting both retailers and consumers — it’s a win win.