Join the lay-by revolution
The new deferred payment services can benefit both retailer and shopper
As households gear up for the peak spending season, retailers will be jostling to capture every dollar. But this year eye-catching displays and discount stickers may not be enough to tempt consumers to buy from your store.
A growing number of Australians are embracing digital “buy-now, pay-later” options such as Afterpay, PayItLater, Openpay and zipPay, and it’s worth considering whether your business should join the trend.
Deferred payment options are a form of de facto lay-by with a twist. The purchase is paid off gradually. However, unlike traditional lay-by, the customer takes the goods home immediately – there’s no need to wait until the purchase is fully paid off. And instead of the merchant receiving the payment directly, the customer makes payment to the deferred payment service.
For the retailer this model brings pluses and downsides. On the upside, the retailer receives revenue almost immediately (certainly far sooner than with regular lay-by) and credit risk, including the possibility of card fraud, is passed to the digital payment provider. Unlike traditional lay-by, there are no costs associated with having to contact customers to chase up outstanding payments, and as the goods go home with the consumer immediately the retailer doesn’t have to wear storage costs.
The companies behind these buynow, pay-later services also point to the potential for a higher spend per customer and increased repeat business. However, whether this occurs for your outlet is a wait-and-see issue.
Cost of convenience
Of course, this convenience comes at a cost. From the customer’s perspective, there are no upfront fees and no interest charges associated with deferred payment options, though late payment fees apply. Purchases are required to be paid off gradually by way of regular instalments, and in the case of Afterpay late payments incur a $10 late fee, followed by a further $7 fee if a payment remains outstanding seven days later. zipPay customers need to make a minimum repayment of at least $40 a month and a $5 monthly fee applies if there is an outstanding balance.
These late fees are not the main game for deferred payment providers. As a guide, late fees accounted for just 20% of Afterpay’s revenue for the 2016-17 financial year. It is fees paid by retailers that are the chief breadwinner.
Exactly what retailers pay to tap into deferred payment services varies between providers, though the structures are broadly similar. Merchants typically charge a flat fee of about 15¢-30¢ per transaction plus a commission of around 2%-6% per purchase. Merchant revenue is paid net of these fees.
When it comes to choosing between providers, the cost may not always be the deciding factor. It can come down to compatibility with your e-commerce and point-of-sale (POS) platform. Afterpay, for instance, is compatible with Magento, Neto, Shopify, Island Pacific, Infinity, Futura4Retail and Commerce Vision. PayItLater, on the other hand, integrates with WooCommerce, Shopify and OpenCart.
It usually costs nothing to bring deferred payment options on board and there are generally no commitment fees. Nonetheless, retailers need to consider whether customers would have made the purchase anyway, especially as payments need to be linked to an existing debit or credit card.
Without extensive credit checks or interest revenue, it stands to reason that these providers impose spending limits on the customer, particularly at the outset of the relationship. Afterpay allows retailers to set a dollar limit per transaction capped at a maximum of $1500. If this is below your outlet’s average purchase, a deferred payment method may not be appropriate.
One thing is certain: the days of traditional lay-by look numbered. For small business owners who have reluctantly had to return unclaimed (and only partly paid for) lay-by items back to the shelf, often at discounted prices, that may not be such a bad thing.