PayPal BrandVoice: Merchants Expand Customer Base With “Buy Now, Pay Later” Options

By Richard Sine

The economic uncertainty brought on by the pandemic has been tough on consumers and merchants alike. 

Consumers must manage their cash flow carefully to maintain their credit, prevent overdraft charges and avoid unsavory options like payday loans. Merchants, for their part, are seeking to lure consumers back to stores and make them feel more comfortable making larger purchases. For both merchants and consumers, then, buying now and paying later—a concept known as BNPL—has become increasingly appealing.

BNPL enables consumers to buy the products they need now without busting their budgets. And it enables merchants to broaden their customer base and drive sales without increasing costs or risks. In a July survey of American consumers conducted by The Ascent, 37% said they had used a BNPL service. Their top two reasons were to avoid paying credit card interest and to make purchases that wouldn’t fit their budget.

Buying now and paying later is not a new idea, but it has evolved over the years. Some retailers still offer layaway, which requires customers to pay off an item before taking it home. Still others offer their own credit cards, which allows consumers to BNPL at a specific store. These options have been partially eclipsed by major credit cards, which consumers liked due to their wide acceptance. But many Americans—especially younger generations—have become wary of credit card debt.

A Credit Card Alternative

Even before the pandemic, Americans were saddled with an average of $29,800 in personal debt, excluding mortgage debt, according to Northwestern Mutual. Scarred by the memory of the Great Recession—and still burdened with student loan debt—Millennials still have fewer credit cards and carry lower balances than older generations. 

While Millennials’ comfort with credit cards is increasing, they—like everyone else—face income uncertainty caused by the pandemic. Some credit issuers have reduced credit lines or tightened lending standards in the wake of the pandemic. And the APR on new credit cards in mid-October averaged 16%, according to CreditCards.com. 

In the last few years, however, a new option has emerged—financing offered to the consumer at the point-of-sale, recently estimated to be a $391 billion market. For consumers wary of credit cards, this can be a powerful option. In a study commissioned by PayPal of 2,000 customers, 56% said they would prefer to pay a purchase back with installments rather than use a credit card.

In response, PayPal has also announced a new BNPL product, Pay in 4.¹ Consumers can pay for items in four interest-free payments over six weeks. Payments are made automatically, and the consumer incurs no interest or fees as long as payments are made on time.

Making BNPL Work

Merchants are finding that BNPL options can significantly expand their customer base, especially for larger purchases. The impact is especially powerful if the BNPL option is promoted while the customer is still browsing rather than just at checkout. 

According to McKinsey, 75% of consumers who seek financing decide to do so early in the purchasing journey. And PayPal data suggests that BNPL is most effective when promoted throughout a merchant’s site, including on the homepage, category pages, product pages, shopping cart and checkout pages. The message reinforcement throughout the buying journey can help convert browsers into buyers. 

As BNPL has grown in popularity, a few startup vendors have entered the arena. They levy varying transaction fees on merchants and varying interest fees or late fees on consumers. PayPal does not charge merchants anything additional for its BNPL products other than its existing transaction fees. 

In contrast to its startup competitors, PayPal merchants that choose its BNPL products benefit from its global network of 346 million merchants and consumers. BNPL options offered at checkout are tied to consumers’ existing PayPal accounts, streamlining the sign-up and repayment process. Consumers know the PayPal name and don’t need to provide personal information to an unfamiliar company. This may help reduce cart abandonment. 

The pandemic has ushered in an era of economic uncertainty for consumers. Fortunately, recent innovations are providing consumers new options like accessing wages off-cycle and making a single purchase using multiple payment methods. Seen in this context, BNPL is yet one more way to improve the match between what consumers need and what merchants have to offer.