Buy now, pay later (BNPL) is a product that got its boom in the pandemic as consumers went online to make their purchases. The product has continued to skyrocket upwards in popularity and has been a widely successful payment method among consumers.
According to data from Javelin Strategy & Research, one quarter of consumers had used the payment method in 2023. Among those consumers, BNPL was most popular with Gen Z and millennials in line with digital payments like app-based wallet payments.
BNPL’s Allure
BNPL isn’t a credit card, but it certainly feels similar. The product offers installment-based financing over a range of typically one to six months generally with no fee. BNPL vendors such as Affirm and Klarna partner with merchants to offer the solution with processing rates around 5% for the typical pay-in-4 model. BNPL costs more to accept than traditional credit cards and certainly more than debit cards, but the vendors promise higher sales conversion rates and average order value increases. But how does this hold up in the market?
In a forthcoming article in the Journal of Marketing, researchers found that BNPL indeed does increase consumer spending. The authors used transaction data from a large retailer pre- and post-implementation of a BNPL service and analyzed the spending patterns of 75,000 consumers who adopted BNPL and 200,000 non-adopters. They found a 9% increase in purchase likelihood and a 10% increase in overall order sizes. Even more interesting—the researchers found that spending increases remained for nearly six months putting to bed falsehoods that BNPL is a ‘one and done’ product.
The researchers also conducted follow up studies that revealed the psychological dimensions of BNPL payments. They found that the ability to divide purchase costs into smaller installments gave consumers “a sense of control” while also making consumers have a perception that the costs were “trivial.” The results remind me of a similar hypothesis reached by researchers at MIT Sloan School of Management that found credit cards reduce the pain of payments and encourage people to spend more. There is something about the immediate gratification of a purchase and paying for it later that credit products tend to satisfy.
