We live in a world of instant gratification, access to a plethora of entertainment a mere click away on the internet. Buying now and paying later (BNPL) services are allowing the same gratification, irrespective of our financial situation. Whether it is the latest expensive gadget, or succumbing to the temptation to buy that new dress for an upcoming party, BNPL services are translating nonviable purchases into reality. BNPL allows you to pay off an item in several weeks, interest-free, under the condition that payments are met on time. Most BNPL services charge merchants a transaction fee, which is outweighed by the increase in customer purchases. Consumers have a healthy appetite for buzzwords like ‘zero interest rates’ and ‘no fees’, especially from the millennials and Gen Z generations.
Millennials Leading The BNPL User Group
Millennials lead the surge of the main BNPL user group, contributing to 40.6% of users, whilst Gen Z follow closely with 35.1%. 90% of millennials are steering away from credit cards, given their risks and costs, and BNPL fills the void. Sarah Willersdorf, director at Boston Consulting Group, said the Gen Z generation “is heavily into subscription and used to paying monthly or weekly for all sorts of payments, even fitness and media. If you are thinking about budgeting, it is really easy for [consumers] to break things down into monthly costs.”
BNPL reduces the friction in the buying process, the anxiety of the subsequent dent in the bank account, allowing streamlined purchasing power. AfterPay, ZipPay, OpenPay, and other services allow the payment in installations, as opposed to traditional upfront means. The trend is shifting away from credit card services, which creates a debt aversion. As a result, Afterpay has seen a 292.78% growth in late 2020, with a $34.29 billion capitalisation. Nicholas Molnar, CEO of Afterpay, said “Consumers clearly want more flexibility and transparency in how they pay, and they want to use their own money to pay over time”. The successes can be attributed to the trend toward digitised payments, attractiveness for consumers, and the potential for partnerships.
Princess Polly, a fashion outlet which implemented BNPL found a 60% increase in average order value, alongside a 20% increase in total sales. SurfStitch, another fashion retailer, announced a 52% order value increase subsequent to the offering of BNPL services. Apple has also partnered with Afterpay, which the head of Afterpay, Zahir Khoja, said “Unlike other BNPL products, which are just a new form of a credit card, Afterpay gives shoppers the ability to avoid expensive interest, hidden fees, and pernicious debt. Afterpay’s current partnership with Apple represents a significant change in the way young people want to pay”.
The Psychology Behind BNPL
The psychology behind BNPL is the elimination of the negative connotations associated with paying for something, given the reduced immediate cost. Research suggests that spending ignites the same brain areas associated with discomfort, pain, and disgust. Furthermore, BNPL utilizes the same tactic as gyms. Paying a gym membership monthly creates a higher chance of membership renewal, optimising the fine line between pain and the value of the product. Smaller incremental payments appear more affordable. Dr Carolyn Mair, a behavioral psychologist, outlined the allure, saying “It’s just so easy. It seems like a credit card, but they aren’t going through credit checks as you would with a credit card or store card and there is the idea of not paying interest”.
Mike Burk, Westpac bank’s senior manager said “Many next-generation (millennials onwards) customers are averse to debt products, however, have flocked in recent months or years to “buy now pay later” schemes. It is materially the same product, but a lesson in packaging these products on the customers’ terms, or at least in customer language. Terminology like credit, loans, and debt are bank lexicons, and terms like this make these customers nervous. Buy now, pay later is a debt or loan product that, through branding or language, gives the perception of empowerment to customers”.
BNPL has become the new frontier of payments, a critical mass to which consumers are flocking towards. Australia saw 120% growth this year. 64% of BNPL users have used it more since the beginning of the pandemic. Credit card companies have also recognized a shift in payment types, as Visa reported a 4% decrease in credit card usage and a 21% increase in debit use. Given the upward trend, estimates from the Bank of America expect the BNPL market to grow 10 to 15 fold by 2025. “Banks definitely see how much buy now, pay later is resonating with customers and they are adapting their offerings to capture a piece of that pie”, said Ted Rossman, analyst at CreditCards.com.
The benefits of BNPL services are clear as crystal, and people are migrating towards it. During the pandemic, income loss and financial insecurity have increased the pressure to seek alternative borrowing methods. BNPL spending is expected to grow into the future, materializing objects which we could not previously afford. The zero-interest payments may render credit cards into mere pieces of plastic, a potential relic of the past.
Related To Buy Now Pay Later And Millennials Investing Landscape: