There are so many reasons for the growth of Amazon: an extensive product range, free same- or next-day delivery, huge and ongoing investment in its website, great customer service and easy returns. But while they all make for an enticing experience, it’s the buying process – the ease in which payments are taken – that is just as critical to Amazon’s ongoing success. With a clear and fast step-by-step process, or the one-click “buy-it-now” button for taking card payments, Amazon has really refined buying.
BNPL – a new option
Apart from credit/debit cards, there is another payment option that Amazon offers – the spreading of cost over several months. Offered by many businesses, not just Amazon, this service is known as “buy now pay later” – BNPL. It’s an unregulated instalment payment option, invariably with no hard search run on a credit file, which seeks to make purchases more affordable. It does this by offering interest- and charge-free options if payments are made on time. BNPL is, understandably, especially popular during holiday seasons when the need to pay doesn’t necessarily marry up with income. Apart from Amazon’s in-house form of BNPL, there are plenty of other providers such as Klarna, Clearpay, Laybuy and PayPal.
The concept of BNPL has enjoyed explosive growth in recent years. As The Guardian highlighted last October (Jones, 2021), UK consumers spent more than £4 billion using BNPL and an estimated 7.7 million Britons have significant balances that average £538 for each borrower. Labelled “the future of millennial finance”, it’s very popular with the under 30s and those on tight budgets. It’s estimated that by 2026 this form of finance could be worth £40 billion a year. So, what started with fashion and make-up is rolling out to bigger ticket items such as home electronics and appliances.
UK consumers spent more than £4 billion using BNPL and an estimated 7.7 million Britons have significant balances that average £538 for each borrower
BNPL is also making inroads into the world of veterinary practices. As noted on Business News Australia in March 2021, Openpay is seeking entry into the US and UK veterinary markets via a new partnership with New Zealand-based ezyVet. Openpay, it appears, has been integrated as a payment option within ezyVet’s vet practice management software, giving pet owners flexibility to pay bills of between £50 and £3,000 over two to six months; longer plans with higher limits are an option. Afterpay Australia’s website has a page dedicated to 35 vets that offer its payment facilities. In the US, Petco has, since August 2021, partnered with Klarna in the provision of new payment services for the company’s 1,500-odd “pet care centres”. Owners have the option to split their bill into four interest-free payments spread over the course of six weeks.
Businesses, it appears – noted The Guardian – will “happily pay lenders generous commission in return for those higher sales. [An] investor said double-digit commission rates were not uncommon in the industry. For lenders, handling payments has shifted from a cost centre to a profit centre” (Jones and Makortoff, 2021).
But BNPL isn’t without its problems. There’s a growing concern in official circles that the unregulated nature of BNPL is causing problems for many further down the road. Some, it appears, are racking up BNPL debts that they cannot afford. And those failing to keep up with the original interest-free period are now accumulating charges or, in some cases, seeing the health of their credit file impacted with loans or mortgages denied following debt collection action.
In the UK, the Financial Conduct Authority (FCA) published the Woolard Review in February 2021, which examined the market. Among its many conclusions and recommendations, the Woolard Review proposed regulation of this form of finance to help the 1 in 10 who are in arrears. Notably, in mid-February 2022 TransUnion said that from summer 2022, BNPL transactions will start to appear on credit files. Furthermore, in early May 2022 BNPL provider Klarna said that it is to provide payment data to credit reference agencies. This move will record missed payments and, conversely, help those with “thin” credit files build up a credit profile as they make consistent payments.
BNPL does have the potential to be a very valuable tool for those looking to enhance their popularity among the buying public
But these problems aside – which, after all, may be down to individuals not understanding the consequences of their actions – BNPL does have the potential to be a very valuable tool for those looking to enhance their popularity among the buying public.
The benefits of BNPL
It’s important to remember that the whole point of BNPL is to promote a frictionless buying experience for buyers – the more “stop” points that are encountered in the buying process, the greater the likelihood of a purchase being abandoned. For retailers – and practices – BNPL offers a way of selling more while being paid upfront, all with protection from repayment risk and fraud.
BNPL opens doors to more people, especially to those who do not possess a credit card. In fact, BNPL is a very convenient way to access financing for many reasons, including:
- There are no separate application forms or application fees
- Minimal additional processing time
- Most providers have simple-to-understand repayment plans and terms
- Customers can buy with ease in just a few clicks after first registration
And as is obvious, the ability to spread the cost – especially if interest free – is a wonderful sales conversion tool which makes customers more likely to make a purchase, especially a large one, if they can pay over time. It’s the reason why interest-free credit appeared a few decades ago. But in contrast to that, as before, BNPL doesn’t always carry a hard credit check. It shouldn’t surprise, therefore, that those who offer BNPL invariably see their average order value boosted as additional items appear less expensive as the extra cost is spread.
For retailers – and practices – BNPL offers a way of selling more while being paid upfront, all with protection from repayment risk and fraud
In practical terms, for online purchases at least, the customer shops as normal, but when they get to checkout, alongside traditional payment options like credit/debit card and PayPal, they’ll also, for example, see a “Pay with [BNPL provider]” button. A quick eligibility check is run, often in the form of a surface inspection of the shopper’s credit history, and the BNPL provider will either approve or reject the customer.
Choosing a BNPL provider
The question for veterinary practices, then (if they want to offer this form of finance), is which BNPL provider to choose? The answer to that will depend on the goods and services sold, the price and their customer base. There are two main considerations: terms and credit limits.
BNPL providers, like banks, offer different products with different repayment periods from weeks and months to years. Those selling higher-value goods and services will do better with a provider that offers payments over six or more months.
Just as customers carry different repayment risks and, therefore, different credit histories, some BNPL providers operate minimum and maximum credit limits. This means, by definition, tying up with a provider that can offer customers enough credit for a purchase to be made.
A simple comparison
While there are multiple providers of BNPL finance, we can see how the concept works by looking at just two.
We will start with Afterpay, which allows customers to break up payments into four interest-free instalments over six weeks. The sale does not require any credit check (not even a soft credit check) during the sign-up process. Afterpay sets initial spending limits for new customers that may increase over time. Sellers get paid within days, while Afterpay takes on the risk of chargebacks and fraud. Daily settlement reports are available that can be used to either verify or reconcile orders.
Klarna, on the other hand, offers buyers more variety with four different ways for customers to pay:
- Instalments which let customers split the cost of their purchase into three monthly instalments
- Pay in 30 days which permits customers time to place orders and try products before paying in 30 days
- Financing where higher-priced items can be paid for over 36 months
- The recently (January 2022) launched Klarna Visacard, which can be used for purchases with 30 days to pay. There’s also a one-time-use virtual card that can be used with online stores but expires after 24 hours if unused. The Klarna card also offers users a free 10-day “snooze” feature if they need more time to pay
Like Afterpay, Klarna accepts full fraud and credit risk linked to customer purchases. It pays sellers within three working days.
Apart from a set-up fee and monthly subscription, sellers can generally expect to be charged between 2 and 8 percent of the payment processed
As for costs, they vary according to provider and the deals negotiated. But apart from a set-up fee and monthly subscription, sellers can generally expect to be charged between 2 and 8 percent of the payment processed, in addition to a small fixed amount. It’s true that BNPL providers charge more than card payment providers, but those providing BNPL find it entices customers to spend. This leaves businesses with a conundrum when considering the addition of BNPL versus the costs: are they better off with, say, 95 percent of something or 100 percent of nothing?
Integration with e-commerce
As to how systems are integrated with existing e-commerce systems, Clearpay says that it will integrate with many platforms such as Shopify, Wix, Magento and Stripe. Clearpay also notes that where its systems do not currently connect to an e-commerce system, it can offer bespoke options for businesses with access to developers. Klarna offers a “complete checkout solution” that can be branded, which also features one-click purchasing after the first purchase has been made. It handles onsite messaging and the pre-filling of billing address fields, and accepts all major payment methods. On integration, Klarna says it’s available through many e-commerce platforms and can be integrated directly into a site. It also offers integration guides for developers.
To an extent, anything that helps practices generate more revenue is a good thing. While there are risks with some spending more than they can afford, it looks like BNPL is going to see regulation in time. However, for the moment BNPL is an option that practices cannot afford to ignore. If they do, they’ll lose out to rivals – especially in what is about to become a financially constrained market.