Small But Mighty
CRobertson/Getty Images
Summary.
As “Buy Now, Pay Later” (BNPL) rapidly gains popularity, many retailers wonder about what this means for their bottom line. New research analyzed the purchase behavior of 275,000 consumers to understand BNPL’s effect on consumer spending….
Today, the widespread ability to use Buy Now, Pay Later (BNPL) schemes like Afterpay and Klarna in online retail is transforming how consumers pay for purchases. Rather than relying on debit or credit cards, consumers are increasingly using BNPL services to spread payments across interest-free installments. However, BNPL is costly to retailers, and policymakers have begun to regulate BNPL due to its broad usage and potential impacts on consumers.
Taken together, understanding how and why BNPL affects consumer behavior is pressing. Is BNPL worth the investment for retailers? What makes them so attractive to consumers — and who is changing their purchase behavior, and why?
The Impact of BNPL on Consumer Spending
In new research, forthcoming in the Journal of Marketing, we show that BNPL increases consumer spending. Leveraging transaction data from a large U.S. retailer, before and after they introduced BNPL, we compared the spending patterns of 75,000 consumers who adopted BNPL with 200,000 consumers who did not.
We found that BNPL adoption led to immediate and substantial increases in spending. Consumers who adopted BNPL were more likely to purchase, with purchase likelihood increasing from 17% to 26%. Furthermore, when adopting consumers made purchases, their basket sizes were 10% larger on average than they were before the introduction of BNPL. Remarkably, these increases in spending were not short-lived: They persisted for close to six months, showing that BNPL drives lasting gains rather than short-term spikes in consumer spending.
Who is most affected? Our analysis suggests that the impact of BNPL is greater for “financially constrained shoppers.” These consumers, characterized by a reliance on credit cards, were more likely to purchase post-BNPL, compared to less credit-reliant consumers, for example those who use debit cards. Similarly, “financially constrained” consumers who previously limited purchases to smaller baskets, increased their spending more post-BNPL. For these shoppers, BNPL increased their basket sizes by 14%, compared to a 3% increase among consumers who were already making larger purchases.
How BNPL Encourages Shoppers to Spend More
To uncover how BNPL increases consumer spending, we conducted a series of experiments where participants were asked to make hypothetical payments either in a single lump sum or in installments. We held all details of the purchase constant, including the purchase amount, to prevent participants from selecting BNPL installments for bigger purchases.
Across these experiments, participants who paid in BNPL installments reported feeling less financially constrained than those who paid in lump sum. These effects held true across a range of different products and varying numbers of installments, even though BNPL required making the first payment immediately, and lump sum payment allowed participants to delay when they made their payment.
Follow-up studies revealed two key factors driving this effect. First, BNPL’s ability to divide the cost of purchases into smaller installments gives consumers a sense of greater control over their budget. Installment payments feel more manageable than larger payments, even when the larger payments are delayed in time. Second, the smaller amounts of installment payments make consumers perceive costs as more trivial. Together, these factors lead consumers to feel less financially constrained, encouraging them to add more items to their baskets.
Opportunities and Challenges for Retailers
Our findings suggest that retailers have strong incentives to offer BNPL schemes. Not only does BNPL encourage consumers to make purchases they would otherwise not make, it also makes them buy more. Thus, introducing BNPL as a payment method drives up revenues.
By spreading the cost into smaller payments, BNPL installments could give consumers more control over their budget. Thus, BNPL could help purchases feel less financially constraining. Additionally, our research found that customers who used BNPL were largely still using it six months later, suggesting that they had not defaulted on repayments and become ineligible to use this service.
At first blush, BNPL might seem like a win-win to both the retailer and consumer. BNPL boosts spending at the retailer yet feels less financially constraining for the consumer. However, care should be taken. Our findings suggest retailers are most likely to see increased spending from consumers who are financially constrained and rely on credit cards to make purchases. Given that other recent research indicates that BNPL could facilitate overborrowing, leading to financial strain, it is important to be cautious about who to offer BNPL schemes to and how much customers should be permitted to use these services. Additionally, policymakers are increasingly regulating BNPL services to protect consumers from excessive debt and financial difficulties. Companies who are considering adopting BNPL must consider these two factors — customer overborrowing and a shifting regulatory landscape — in addition to revenue gains when considering whether or how to introduce BNPL to their customers.
. . .
One limitation to note is that while we looked at hundreds of thousands of transactions, our data is derived from one retailer. It’s possible that retailers focused on different markets may experience somewhat bigger or smaller impacts. However, given their massive usage and appeal, BNPL installment payments are likely to remain a core feature in online retail and our research provides important evidence of its impact on customer behavior. Understanding BNPL’s impact on customers and revenue will allow retailers to capture the value BNPL can offer while better understanding how they can better serve the needs of their customers.