The Future of Payments is Here: How Buy Now, Pay Later Can Add Value for Both Consumers and Merchants

By Theodora Lau and Bradley Leimer of Unconventional Ventures??

(This is the first in a series of articles by Unconventional Ventures in partnership with PayPal.)

Consumer behavior changed dramatically during the pandemic. From touch-free payments to delivery and pick-up alternatives, consumers are embracing new products and services and new ways to make purchases. While this has been partly born out of necessity due to safety and health concerns, it is also a reflection of the ongoing digital transformation that began even before the pandemic. The acceleration of e-commerce adoption has also changed the dynamic between consumer and merchant.

With the steady increase in the use of digital wallets, other non-bank fintech applications, and associated innovations within digital payments, consumers are experiencing a rapidly evolving checkout experience, changes in ways they can use credit, and how they track and manage their spending.??

The Growth of Buy Now, Pay Later??

This extended period of economic uncertainty has brought about changes to workplace environments and everyday consumption, as well as economic fallout across geography. Beyond pandemic-related health concerns, according to PwC, over 78% of consumers said they have been economically affected by the crisis, and 38% of U.S. consumers had their employment affected by COVID-19. It’s no wonder more consumers have indicated that they are more anxious about certain personal financial challenges.?

How can consumers and merchants navigate this new normal, in a way that benefits both parties? Payments innovation is the place to look. A new option, Buy Now, Pay Later (BNPL) has really taken off in recent years. In the U.S. alone, the BNPL market is expected to grow 41.7% on an annual basis, reaching over $126 million in 2021. This checkout trend leverages flexibility and convenience for the consumer while promising greater loyalty for merchants in the long term.?

Broadly speaking, BNPL provides consumers with the ability to manage their spending while softening the impact of larger purchases. While a study by Morning Consult showed that U.S. consumers who used a BNPL service were more likely to report income volatility than those who used credit cards, leveraging BNPL can potentially help consumers avoid interest charges, and improve cash flow while paying over time.?

During times of greater financial duress, the flexibility of payment associated with BNPL is especially attractive to merchants, who seek to offer more customer-friendly solutions.?

It is also important to message to shoppers earlier in the journey –– not just at checkout. According to PayPal’s Q3 2021 earnings release, approximately 950,000 merchants have customers who use our Buy Now, Pay Later capabilities, and 65,000 have positioned Buy Now, Pay Later upstream on their product pages. This is a trend that will only continue to grow. And merchants are taking notice.?

How Buy Now, Pay Later paves the way for deeper loyalty?

According to a Forrester and PayPal survey, younger consumers said the ability to borrow without interest for a period of time was the most important factor in choosing the BNPL option at checkout. A separate survey by PayPal and Netfluential indicates that consumers liked the convenience and consistent option of using Buy Now, Pay Later across merchants as well, as 28% of consumers ages 18-39 said they were more likely to shop at a merchant again that offered BNPL options. Further, 48% said Buy Now, Pay Later will allow them to spend at least 10% to 20% more than they would using a credit card, according to CNBC. The potential for increased conversion rates, coupled with possible higher average order value (AOV), make offering BNPL an attractive option for merchants.?

Transparency is a key to retaining customer loyalty and brand trust. Consumers appreciate the full disclosure of costs associated with their purchases. Explaining to consumers how BNPL works — at or before the checkout process — is critical as merchants partner with providers and roll out these services. This is why partnering with the right provider is a critical decision for each merchant.

How PayPal’s Pay in 4 bundles consumer and merchant value

BNPL is not a new concept. Through their acquisition of Bill Me Later back in 2008, PayPal first started offering users credit lines with special financing options.?

More recently, usage of Pay in 4 has gained momentum ever since PayPal introduced their BNPL solution. According to PayPal’s latest earnings call, since the launch of buy now, pay later, the company has processed approximately $5.4 billion in total payments volume (TPV), with $2 billion of that TPV in Q3 2021 alone. Over 9.5 million consumers have transacted more than 33 million times with the buy now, pay later products.?

More importantly, PayPal has eliminated consumer late fees for buy now, pay later purchases starting in October 2021 — a move that helps to make its product more attractive to consumers. It turns out that combining what consumers desire (flexibility and control) with a brand they already use and trust (PayPal), with something they want or need, can create a win-win for merchants that offer payment options like PayPal Pay in 4.?

Presented within a unified digital wallet that provides access to payments, credit, and a growing merchant network of products and services, PayPal’s Pay in 4 service is an integral part of an evolving financial services business model.?

Learn more about how merchants can offer Pay in 4 from PayPal.??

___

Additional Resources?

6 ways the pandemic is changing consumer shopping habits, PayPal, December 2020?

How ‘Buy Now, Pay Later’ Consumers Differ From Credit Card Users, Morning Consult, July 27, 2021

Pay In 4, PayPal’s Buy-Now-Pay-Later Product, Resonates With Shoppers, Forbes, June 8, 2021

Digital payments: Achieving the next phase of consumer engagement, McKinsey, November 25, 2020

Nearly 90% of Americans now use fintech—with boomers the fastest-growing demo, Fortune, October 12, 2021

5 Ways PayPal Pay Later is Unique, PayPal (YouTube video)?

___

About Unconventional Ventures

Unconventional Ventures helps drive innovation to improve systematic financial wellness. We connect founders to funders, provide mentorship to entrepreneurs, strategic advisory services to a broad set of corporates, and broaden opportunities for diversity within the ecosystem. Our belief is that anyone with great ideas should have a chance to succeed and every voice should be heard. We work with financial institutions, fintech startups, technology firms, and corporates working within financial services and tangential verticals. Visit unconventionalventures.com to learn more.