There are so many aspects that go into running your e-commerce store – finding the right combination of products, creating eye-catching product pages with tasteful images, reaching relevant customers with your marketing efforts, managing inventory and shipping. With so many things to keep track of, the decision of which payment option to use probably falls to the bottom of your to-do list.
A payment is a payment, right? Wrong!
Selecting a payment method is one of the most critical elements of the customer journey, and offering the right assortment of payment options is a great way to impact your conversion rate.
Think of it this way: By the time a prospective customer reaches the payment phase of the checkout they have already made the decision to purchase. They’ve found your site, chosen a product, and selected the right size and color. After doing all that leg work, any friction caused by the payment process can result in a lost sale.
A customer is not a customer until they click that pay button. As an e-commerce site, you want to make clicking that button as easy and frictionless as possible. “Buy now, pay later” solutions are part of a new wave of alternative payment methods that improve checkout conversions for merchants.
By allowing shoppers to pay for purchases over time, this new payment solution makes online shopping more accessible for those who can’t pay for the entire purchase up-front or are fearful of amassing credit.
A brief history of the “Buy Now, Pay Later” solution
Retailers have long provided shoppers the ability to pay over time with instalments. Layaway options became popular in the United States during the Great Depression, when retailers began offering them as a way to generate sales from cash-strapped consumers. In the old layaway model, shoppers would physically go to the store and put down instalment payments for merchants to hold an item they wanted. Once a shopper had made enough payments to cover the purchase, the sale was complete.
Then, in the 1950’s, a new innovation allowed shoppers to pay over time: the credit card. With credit cards, shoppers are able to swipe, receive their items immediately, and then pay the credit card company back at a later date. Credit cards quickly became ubiquitous as a form of payment. However, credit cards are only available to those who get approved, and consumers tend to rack up exorbitant interest and fees over time.
Fast forward to today. The advent of new fin-tech innovations offer modern alternatives to credit cards, like “Buy Now, Pay Later” (BNPL) solutions.
How does BNPL work?
BNPL allows shoppers to pay a fraction of their purchase price at the time of checkout and the merchant will ship their item right away. The payment platform then pays the merchant upfront for the full amount, less a small processing fee.
Sezzle, for example, allows shoppers to split purchases into four instalments at zero percent interest. Shoppers pay 25% at checkout and the remaining instalments are automatically collected every two weeks.
The use of an underwriting algorithm leverages alternative data that allows consumers who would not qualify for a credit card based on traditional credit scores to be approved.
In short, BNPL options provide a new way for shoppers to buy their item, get it immediately, and then pay for it over time at no additional cost.
The benefits of offering a BNPL option
There are many benefits to offering an instalment payment option to your consumers, including:
1. Reaching new customers
Offering only credit card options can alienate potential customers. Credit cards are a great purchasing tool—for customers who have them. While that may not seem like a huge problem, the number of credit card holders in your target audience might be far fewer than you think. Only one in three millennials owns a credit, according to a 2016 Baymard Institute study.
From the credit crisis of 2008, to mounting student loan debts, to regulatory changes, it’s more difficult and dangerous than ever to have a credit card. And some consumers are reacting to this by choosing not to use one at all.
Expectations have changed as well. Shoppers now expect to be able to pay with a digital wallet, alternative payment platform, or an instalment plan. So providing these options isn’t just a nice to have, it’s necessity; because if you don’t offer them, you could be leaving potential sales in the cart.
2. Increasing conversions
More than two-thirds of all online shopping carts are abandoned, according to ID Analytics. The second most commonly cited reason was the cart becoming too expensive.
When customers see the total tallied up, they experience what is frequently called sticker shock—consumers abandoning their shopping carts altogether because the total price is higher than they are comfortable with.
Offering an instalment payment solution that lets shoppers check out now and pay over time dramatically reduces cart abandonment rates leading to more sales. On average, stores that offer a “Buy Now, Pay Later” option see checkout conversions increase by almost 40% for first time visitors.
3. Reducing return rates
High return rates are a pain point for merchants all across the board. When customers consistently return their purchases, it adds a lot of unwanted and unneeded stress .
The return rate for online purchases is at a whopping 30%, so the more options you can offer when it comes to payment methods will help people feel more confident in their purchases.
4. Meeting millennial expectations
“Buy Now, Pay Later” solutions have exploded in popularity in recent months. In other parts of the world such as Australia and parts of Latin America, similar payment methods have become ubiquitous forms of payment.
Young shoppers prefer the freedom of paying over time, without the financial pitfalls that credit cards pose. For them, they see these solutions as a kind of on-demand layaway for the digital age. As more and more major brands accept these payment methods, the trend will only accelerate.
Regardless of the payment options you provide, always put the customer first
“Buy Now, Pay Later” payment solutions are a proven way to reach new consumers, increase conversions, and tap into what Visa has called a trillion dollar market. Offering the payment solutions your customers want will have a dramatic impact on your sales and customer lifetime value.
As you consider which payment methods to use, think of your customer first. From your customer’s perspective, the payment process is simply an extension of your store. A bad payment experience – whether it involves high interest rates or getting hit with hidden fees – equates to a negative shopping experience. Therefore, it’s important that merchants align themselves with payment options that fit with their values and customer experience standards.
