Online instalment purchases the trend
Buy-now-pay-later catching on with both consumers and retailers
Buying in instalments used to be a niche payment option, a staple of infomercial hustlers looking to cast the widest net — and present the most affordable price — possible. But if you shopped online during the pandemic, you probably noticed that virtually every major online retailer and thousands of smaller ones are now offering some version of buy-now-pay-later — BNPL for short — at checkout.
Turning a $100 purchase into four easy payments of just $25 doesn't sound like the stuff of riches, but for the global financial technology companies fighting for control of your checkout basket, it's an equation worth billions.
Sweden's Klarna Bank AB, a leader in the BNPL space, has been touted as Europe's most valuable startup and reportedly raised US$639 million in mid-june at a valuation rocketing north of US$45 billion. According to its financial reports, Klarna saw its merchandise volume jump by 46 per cent to US$53 billion on its platform for the full year of 2020.
Australia's Afterpay Ltd., which counts Aritzia and Roots among its Canadian customers, is another major BNPL player, along with U.s.-based Affirm, which has partnered with Shopify Inc. on its instalment program. Both are publicly traded and have market caps in the tens of billions.
For consumers, having a third-party merchant finance the cost of an item in a series of instalments can, as the infomercial set learned long ago, be an enticing proposition. Merchants like it, too, because it can boost order sizes and bring consumers who might not otherwise afford their products into the fold.
But for the fintechs themselves, the big prize — in addition to fees collected from merchants — is to get a piece of the lucrative financing business that has long been the domain of the credit-card giants. The programs work on a variation of a theme, with payment plans that allow customers to make regular instalment payments until the purchase is paid off. Miss a payment, or choose to extend the purchase period, and in some cases you may be faced with interest or fees on top of the original price.
This trend in particular has seen a pickup in the U.S. as the pandemic pushed sales online and the deferred-payment model caught the attention of financially strapped Millennial and Gen Z buyers.
The credit-card companies are watching, too. Visa, for example, announced June 24 that it is launching its own flexible payment program called Visa Installments in August, partnering with Scotiabank as the first issuer to allow instalment payments on the Scotiabank Visa credit card. This includes a new option to convert purchases that have already been made into smaller instalment payments over a period of time. Later in the year, Visa will also partner with merchants so that they will have Visa Instalment options in their checkout process.
Brian Weiner, the vice-president and head of product and digital at Visa Canada, told the Financial Post that payment terms depend on the cardholder's eligibility and the merchant's offering.
“The solution is built to scale,” Weiner said. “It has the flexibility baked into it to be able to create different types of offers, depending upon the unique nature of the transaction that's taking place and depending upon the specific cardholder in mind.”
In a release, Visa noted that instalment payments currently account for over $1.7 trillion in global payment volumes. Within Canada, the adoption rate was boosted by 30 per cent in the last year with payments in the country expected to stand around $50 billion annually.
The growing popularity is bringing many e-commerce players into the market. Shopify, for example, launched its Shop Pay Installments program in partnership with Affirm last July and recently rolled it out to U.S. merchants.
Merchants of any size can use the flexible pay option to break up payments in four equal interest-free payments. The program also touts a “no additional, late or hidden fees” policy, though according to its website those who fail to make a payment could be barred from using the service in the future.
Saad Atieque, the senior product lead at Shopify, said in an interview that about a quarter of merchants in the early access phase saw a 50 per cent higher average order value through Shop Pay Installments compared to other payment methods.
Toronto-based Paybright, which works with retailers such as Hudson's Bay, also offers a flexible payment method at checkout. Once a customer makes an online purchase between $35 and $1,500, then Paybright will automatically charge their credit or debit card in four equal bi-weekly payments.
Another Canadian company looking for a piece of the pointof-sale finance market is Flexiti Financial Inc., which works as a sort of retail-partnered credit card that offers its cardholders the “buy now, pay later” option with instalment payments. Peter Kalen, the founder and chief executive officer of Flexiti, said the company receives its revenue through the partnered retailers and cardholders if they carry a balance on their card. With retailers, Flexiti charges a rate higher than credit and debit cards, typically around six or seven per cent. This gives retailers the right to allow customers to pay between six and 48 months later depending on the plan.
What sets the company and many others like it in the “buy now, pay later” space apart from traditional credit-card companies that offer instalment paying options is that the customers make the choice to pay in instalments before they complete the purchase.
“The difference is, we are partnering with retailers and we're integrated with retailers where the retailer is promoting the offer to the customer,” Kalen said. “So, it's factoring into their decision-making around the purchase.”
Kalen said the company is targeting partnerships with companies such as furniture retailers Leon's and The Brick because of the big-ticket purchases they support, making it more likely that the consumer will want to pay in instalments. That has allowed them to ride the home improvement boom as consumers furnished and decorated new homes bought during the pandemic.
During the next few years, Kalen said the company plans to onboard more retail partners, overhaul and upgrade the platform, and begin conversations around capturing smaller-ticket business.
Visa, Weiner said, has been closely following how Canadians have been making purchases in recent years, and old models may no longer be enough.
“The COVID-19 pandemic has created a sort of reset in the spending habits of Canadian consumers, particularly when it comes to how they pay,” he said. “A growing number of Canadians want flexibility and choice.”
The difference is, we are partnering with retailers and we're integrated with retailers where the retailer is promoting the offer to the customer. So, it's factoring into their decision-making around the purchase.