Buy now, pay later services.


11th February, 2019

The pros and cons of ‘buy now, pay later’ services

Small businesses around Australia are offering ‘buy now, pay later’ options at checkout, making purchases seem more affordable. If you’re considering joining the growing trend, there are some things you might want to consider.

What is ‘buy now, pay later’ and how does it work?

‘Buy now, pay later’ offerings are specialised credit lines in consumer finance that works as an incremental payback system – making it easier and more attractive for people to pay for goods and services.

The Australian Securities and Investments Commission (ASIC) lists six third-party providers that offer this kind of service on its Moneysmart website, including the likes of Afterpay and Zip Co.

These third-party providers offer consumers an interest-free loan on the condition that the balance is paid back within a certain time frame. Once that time frame is up, if there is still an outstanding balance, interest rates or late fees begin to apply.

Since their arrival on the scene, micro-loan-as-payment options have taken off everywhere in retail, including fashion, homeware and hardware outlets, as well as in-store and online. Even tradies and micro-proprietors have started integrating it into their billing platforms.

READ: What will the payments industry look like in 2020?

Enabling such payment methods in your business offering comes with a list of pros and cons – so it’s important to fully understand the fine print before taking the plunge.

Here are five things to keep in mind.

1. They help convert browsers into customers

Another leading third-party provider of ‘buy now, pay later’ solutions in Australia and New Zealand, Zip Co offers various financing options for all sorts of businesses, and has recently begun focusing on how their offering integrates with the SME space.

When asked what the primary benefits of integrating such a solution, Larry Diamond, Founder and CEO of Zip Co said the main benefit was a higher rate of conversion.

“Consumer finance is really all about converting browsers into paying customers,” Diamond told The Pulse.

“Retail has always been a very competitive space and whether it be online or at your store front, offering a ‘buy now, pay later’ solution for potential consumers has proven to significantly increase customer acquisition and conversion rates.”

2. They increase your average order value

If a customer walked into a jeans shop with $50 in their pocket with the intention of buying one pair of jeans, the maximum revenue that the jeans shop could receive from that customer was $50 – that was before ‘buy now, pay later’ came along.

By offering these solutions, depending on what it is that you are selling, that original limit of $50 could potentially increase 10-fold.

According to Diamond, another significant benefit of offering this payment option has to do with the “increased revenue that it brings from customers”.

When you make it easier for people to purchase your goods or services, they will be more comfortable with spending.

3. They can improve your customer life cycles

A huge part of retail and professional services marketing comes down to how positive the experience was for the customer when they were spending money on products and services.

Diamond explained that by offering this type of payment solution, your business can set itself apart from others in the sense that customers are satisfied with their experience and become “more likely to come back for more” and “refer your business to others”.

4. They incur higher merchant fees

With all the clear benefits of this innovative payment method, it’s important to be aware of the challenges and considerations that come with integrating the ‘buy now, pay later’ into your offering.

While credit providers make some of their money on the customer side through various fees, they also charge a merchant fee, a cost that’s often included in the overall cost of the goods or services being sold.

When it comes to incremental payback options, the credit providers need to charge merchant fees as well, but given the nature of the credit type, the merchant fees tend to be more expensive than that of other standard credit providers.

The reality is if the business looks at the bigger picture, these higher merchant fees normally get absorbed in the overall benefit that this payment solutions brings. But according Diamond, there can be more to it when it comes to SMEs with low gross profit margins.

“Given that small retail businesses and service providers often have low gross profit margins, it is crucial to consider that the added cost of higher merchant fees might raise the immediate cost of sale.”

5. There can be integration challenges, plus accreditation rules

With the wide variety of e-commerce and point-of-sale platforms available, integrating a ‘buy now, pay later’ solution often “requires specialised customisation tools” that can be “complex and expensive”, according to Diamond, decreasing the overall value that such a solution offers.

Because of this, Diamond suggests that, before a small business locks in a contract with a third party ‘buy now, pay later’ credit provider, the business owner considers factors like “cost, technology, framework for scale and the customer experience”.

Aside from the potential challenges software integration can bring, Diamond also explained that “not all business are eligible” to offer their customers an incremental payback solution and that business owners need to do their research into whether they adequately meet the eligibility criteria.

For instance, gaming and tobacco companies are not allowed offer this type of payment option and there are also minimum turnover requirements for other retail companies.

The future of ‘buy now, pay later’

The ‘buy now, pay later’ industry is evolving rapidly and, according to Diamond, while we can expect to see the expansion of the offering to many more businesses, we should also prepare to adapt to some “regulatory changes” that are beginning to become inevitable.

READ: Your guide to new payment technology

“The future of the industry will see this offering’s expansion into more places.

“In particular, we will start to see more of its use in the professional services industry.

“However, as we’ve seen from the recent attention that this type of lending has been receiving from ASIC and other government bodies, businesses can also expect to run into regulatory pressure, which will mean that models of this solution will need to change and businesses will need to align themselves with this evolution.”