How to Use Buy Now, Pay Later with Equity in Mind
The financial ramifications for consumers and what retailers can do about it.
By: Sadichchha Adhikari, Maddie Goertzen
Buy Now, Pay Later (BNPL) is quickly gaining popularity in the e-commerce space. An easy-to-use, digitally enabled installment loan program, BNPL has removed barriers to purchasing for many shoppers and has provided retailers with increased cart sizes, accelerated consumer decisions to purchase, and increased consumer buying power.¹ Versions of BNPL have existed throughout the history of commerce in different capacities — installment plans, layaway programs, and payment plans. For more in-depth information, check out Slalom’s overview of the emergence and implementation of BNPL here.
BNPL, similar to traditional financing methods helps to remove the barriers to entry for customers. This new type of financing option has become a lucrative mechanism for retailers, often increasing cart value by $100 and increasing repeat customers.² Despite the positive impacts BNPL has had on retailers, one of the downsides is that the system is inherently inequitable for consumers. Low interest rates, lack of transparency, and many other qualities of BNPL have made it an easy option for younger consumers, ultimately leading to irresponsible spending, debt, inability to pay, and financial stressors.³ Why is BNPL such an attractive option for consumers? How can we consider the ramifications of implementing BNPL? More importantly, how can retailers implement BNPL with equity in mind?
A Brief History of Financial Inequities
Throughout history, there have been many examples of inequitable, predatory behavior by financiers. Predatory lending describes “practices that impose unfair, deceptive, or abusive loan terms on borrowers.”⁴ Often including very high interest rates, fees, sales/lending tactics that are created to take advantage of vulnerable borrowers, and very low transparency, predatory lending has been used by financiers to take advantage of those who are unaware of its negative impacts, particularly those who are part of disadvantaged and marginalized communities. More specifically, almost 75% of BNPL users are younger populations, Gen Z or Millennials who may be facing more financial instability and need to rely on systems with more financial flexibility.⁵
BNPL is of course beneficial to retailers, but when imposed without regulations, has proven to be a source of debt, confusion, and overall financial distress for many of its customers. In fact, a survey conducted by The Ascent showed that 45% of consumers used BNPL to make purchases that don’t fit in their budget and 31% of BNPL users have made a late payment or incurred a fee, and 36% of users say they are “at least somewhat likely to make a late payment within the next year”.⁶ While programs like these are set up to increase commercial capabilities, we must understand the detrimental impacts they can have on younger, and poorer populations. Before we get to the negative impacts of BNPL, however, we must first understand some of the qualities of this financing option that helps attract vulnerable consumers.
Low Barrier to Entry
Little to no interest fees and soft credit checks provide younger consumers with easier opportunities to purchase using BNPL. Gen-Zers use of BNPL, for instance, has grown six-fold from 6% in 2019 to 36% in 2021, closely followed by the tripling of Gen X adoption and doubling of Millennial adoption.⁷ For younger consumers, BNPL eliminates the need to be “credit worthy” via credit checks and allows them to make purchases without having to build healthy and sustainable credit over time.
BNPL Branding
The marketing that that BNPL brands have instilled across their websites and social media channels showcase a more modern aesthetic that is distinctly different than their traditional fintech and credit card counterparts. Klarna, a prominent BNPL company, shared a TikTok video on how to use Klarna’s one timecard for paying for school tuition and purchasing classes, the video teaches the viewer “how to pay for your class in four easy payments, no biggie!”.⁸ The use of bright colors, trendy typography and partnerships with TikTok influencers emphasizes the brand towards young consumers and encourages them to consider this “easy” option for payments.
Lack of Transparency on Long-Term Impacts
Traditional layaway programs do not allow the consumer access to the product without at least one installment paid in full, whereas BNPL consumers can access the product immediately. The Federal Trade Commission notes that there are state specific laws that protect consumers and provide greater transparency. For example, California states that retailers must provide the seller with a written statement of the terms and conditions of the agreement.⁹ With a lack of regulations and lack of structured support for those who default on their payment, many consumers who are unable to pay are left without an understanding of how their personal financial health is impacted and who they can turn to for help.¹⁰ Affirm, one of the pioneers of the BNPL industry, does not require late payments, consumers do not have late fees payment reminders, and instead, their credit score is impacted silently. While systemic concerns like this one are prompting the Consumer Financial Protection Bureau to open an inquiry into the 5 major providers, Affirm, Afterpay, Klarna, Paypal, and Zip, one-third of BNPL consumers already find themselves behind payments.¹¹ ¹²
Retailers, why should you care about using BNPL equitably?
BNPL is not financially detrimental to the retailer, the companies that supply the service (Affirm, Klarna, etc.) take on the financial burden of the purchase. Before we consider cost- and time-consuming equitable practices, we must understand why it’s important to make equitable decisions as a retailer.
It’s the right thing to do.
BNPL and similar financing options have been prone to inequitable practices. In fact, retailers have created entire business models around similar financing schemes that lack transparency and are targeted to exploit marginalized communities. California’s attorney general has sued such businesses for cheating their customers and charging them absurdly expensive prices for products diluted by installment plans.¹³ In today’s commerce landscape, where 82% of shoppers would pay more for a values aligned brand and 60% of shoppers said they have already made a purchase from a brand that aligned with their values, doing the right thing has become more than just an ethical decision, it has become one about future revenue potential.¹⁴ As regulations and speculations around BNPL grow, consumers will seek transparency and fairness within a company’s operations, inclusive of financing options.
It eliminates the opportunity for a bad employee and customer experience.
Using BNPL to target customers who do not have the ability to pay forces a series of events that is cumbersome, but also potentially harmful to the brand. Consider your own experiences as a consumer: if you are unable to pay for a product you purchased, rather than contacting the BNPL provider first, you are likely to go to the customer service department of the retailer first to try and facilitate a return. While this creates an avoidable bottleneck in the customer service department, more importantly, it creates a negative experience for the customer who not only needs to jump through multiple hoops to facilitate a return, but ultimately will not be able to use the product.
If the purpose of a financing option like BNPL is to boost customer retention and long-term value, their ability to pay plays a significant role in their ability to continue purchasing. Just as brands measure NPS and other brand value factors, they should be collecting data on BNPL consumer feedback to avoid pitfalls of a negative consumer experience.
Get ahead of regulations
Much like the changing landscape of the industry itself, regulations for BNPL are also imminent. More specifically, California is leading the way on regulations and has classified BNPL as a loan provider, subjecting these companies to lending rules that force transparency in disclosing terms and assistance for consumers who are unable to pay.¹⁵ The legal ramifications are not necessarily going to be limited to the BNPL providers, it is likely that retailers will also be part of the regulatory scrutiny.
For example, the Financial Conduct Authority, the United Kingdom’s conduct regulator for 51,000 financial services firms, recently released a review of BNPL where they assigned retailers the role of “Credit Broker” in the BNPL process.¹⁶ As such, national organizations even involving retailers in the BNPL regulatory process indicates that there is a future in which retailers are a legally bound part of the system. The incentive for retailers to practice transparency and education, as opposed to exploitation, can also be used to get ahead of regulations and ensure any investment in this changing industry is one that is fit for the long term.
How can Slalom help you approach BNPL from an equitable lens?
To approach BNPL through an equitable lens, we must first recognize that banking institutions are not designed with historically marginalized communities in mind.¹⁷ This applies particularly to the types of BNPL requirements that have allowed companies to achieve high volume customer growth. Because these services often do not charge interest fees, they instead charge fees for late payments, a consumer could be behind on a payment and still be allowed to take out more debt with other BNPL platforms thus falling into a debt spiral.¹⁸ While issues like this require systemic, regulatory changes, here is how Slalom’s experience intersecting customer and technology strategy can help retailers incorporate BNPL more equitably.
Educate your consumers: Customer Strategy meets Digital Strategy
Educate your consumers on what using BNPL means in a clear and transparent way. Remember that the messaging you’re using is just as important as the consumers’ experience with your BNPL service and that they don’t feel they are coerced or mislead. A single poor experience can quickly lead to mistrust and a bad reputation risking long-term customer loyalty and retention. Slalom can help ensure your customers have all the intel and understanding regarding the implications of how BNPL works and how it might affect them before they get to completing the check out.
Consider your audience to understand who might be opting to use BNPL. Twice as many Gen-Z and Millennials used BNPL over Gen X and Baby Boomers in January 2022, and twice as many Black and Hispanic consumers used BNPL over White consumers.¹⁹ Knowing the demographic of BNPL users and knowing that one third of Americans are already behind on payments, why are consumers racking more debt and seeing declining credit scores with this feature that was intended to boost consumer purchase behavior in a positive way? Because there is a lack of education to consumers in the market the customer experience with BNPL education is poor. It is important to improve content visibility and a seamless digital user experience that enables a better overall customer experience. Merchants can alleviate future pain points if their customer is well informed on the implications of their purchase.
Here’s an example: The information shared with the consumer at the point of sale (example below) is not necessarily focused on educating the customer on the implications of BNPL, but on its benefits.
While the “interest-free” and “no impact on your credit” aspect is listed, there is no additional information anywhere else on the retailers’ website about what using BNPL means for the consumer.
Looking at a large, big-box retailer’s FAQ (see example below), however, there is a little more information about the late fee implications when there are late payments.
As such, retailers can easily work with BNPL providers to get the fine print information to include in an FAQ or link to a BNPL policy that lists details and definitions, benefiting consumers who are looking for this information.²⁰
Slalom’s vast experience with designing digital strategy from a customer lens, can help you define the messaging and elements needed to reach the customer. Our approach in this instance would start with a thorough research plan to get customer feedback, a messaging and brand strategy to align this educational piece with the rest of the brand, and a roadmap or blueprint to implement these changes.
Consider BNPL as a tool to alleviate immediate stress for consumers who can afford to buy, rather than a mechanism to attract customers who cannot: Risk Assessment and Likelihood of Adoption
Installment plans can cause disillusionment and disconnect with the total price of a product, which can increase temptations for younger audiences and other consumers who can’t afford the product to make the purchase. However, breaking down the payment for a product that is seen as an investment purchase is more convenient, and less expensive to use than taking out a loan from a bank or paying off a credit card bill with added interest. This message that BNPL services can help customers to manage their money more effectively but should be done so with caution for economic risk should be considered across e-commerce platforms and promotional channels.
How can Slalom help identify whether BNPL is right for your customer base? We’ve already covered in an earlier post, ways we can help provide insight into likelihood of adoption, and to identify key changes in customer journey that would benefit from an option like BNPL, but part of our analysis also includes a risk assessment and a fundamental understanding of retailers’ customer base. Slalom can help uncover the answer to key questions: Who are your customers, where are their pain points, should BNPL be implemented to alleviate their pain points? Your consumers — would they even use something like BNPL, or will it cause more harm, negative experiences with the brand, based on their patterns of buying?
Bolster Company Focus on Financial Inequities: Vendor Analyses
As more and more information and regulations emerge on the negative impacts of BNPL, retailers must consider criteria that are human centered, like transparency and education, as part of vendor analyses when deciding on an appropriate provider. Companies like Afterpay and Zip Pay, for example, only have listed in their fine line agreements that they ‘may’ run a credit check on their customers to ensure they are able to make repayments.²¹ This would have a negative impact on the customers’ credit scores but are retailers considering these factors when choosing a BNPL vendor? Some key questions Slalom can implement in a vendor analysis to make the BNPL choice more inclusive:
- First and foremost, is buy now pay later right for my customer base?
- Does the BNPL provider charge late fees?
- Are there any hidden fees with my BNPL providers?
- Do they provide their partners with language educating the end users on implications to their personal finances, or would this be an additional investment?
Regulations in BNPL are growing and will become part of the currently regulated financial environment, so it makes sense for retailers who are considering this financial option to not only be aware of its negative impacts, but to establish practices early on to get ahead of it. While so far there have been limited regulations in the US around BNPL compared to measures taken in the UK, EU and Australia, the Consumer Financial Protection Bureau (CFPB) is making strides to hold BNPL platforms accountable for some of the negative impacts it has had on our consumer base.²² More specifically, the CFPB issued orders to collect information from some of the top BNPL platforms under the concern for public safety, the areas under scrutiny include the accumulating debt, regulatory arbitrage, and data harvesting.²³
As the BNPL consumer base grows, merchants need to be aware of the implications it has on financially vulnerable individuals and the practices that the BNPL brands instill to recruit and retain new audiences. Increased regulations provide an unknown for the future of the service and the effect it will have on merchant to BNPL partnerships. Slalom’s background on pushing for customer centricity and human-centered design within organizations will be critical in any BNPL decision-making, but particularly to approach BNPL equitably. With the changing landscape, preparedness will be crucial, but the choice to be more transparent, provide education to consumers, and consider infusing ethics into BNPL decisions is simply following the basic Slalom principle of doing what is right, always.
About Slalom
Slalom is a modern consulting firm focused on strategy, technology, and business transformation. In 40 markets around the world, Slalom’s teams have autonomy to move fast and do what’s right. They’re backed by seven regional innovation hubs, a global culture of collaboration, and partnerships with the world’s top technology providers. Founded in 2001 and headquartered in Seattle, Slalom has organically grown to over 10,000 employees and is routinely named a best place to work. Our clients include more than half the Fortune 100 and a third of the Fortune 500 — along with startups, not-for-profits, and innovative organizations of all kinds. Learn more at slalom.com.
Authors
Sadichchha Adhikari
Sadichchha is a Customer Strategy Consultant with a passion for retail and a background in customer insights and analytics with a practical focus on consumer research. Sadichchha has authored a book, Beautiful People, on the business implications of inclusive beauty products and has worked several international Fortune 500 companies to help them with decision-making through the customer lens.
Maddie Goertzen
As a Customer Strategy Consultant, Maddie engages with clients to realize their strategic vision for their customer and employee experience. Her previous engagements span both the US and Chinese markets with a focus in retail and consumer goods.
References and Footnotes
[1] The Emergence of Buy Now, Pay Later. Medium. 2021. https://medium.com/slalom-customer-insight/the-emergence-of-buy-now-pay-later-bd6928149faf
[2] The Emergence of Buy Now, Pay Later. Medium. 2021.
[3] Buy Now, Pay Later Surges US Users Fall Behind Payments https://www.reuters.com/technology/buy-now-pay-later-surges-third-us-users-fall-behind-payments-2021-09-09/
[4] Predatory Lending. Investopedia. 2022. https://www.investopedia.com/terms/p/predatory_lending.asp#:~:text=Predatory%20lending%20is%20any%20lending,loans%20they%20can't%20afford
[5] Almost 75% of BNPL users in the US are Gen Z or Millennials. EMarketer, 2021. https://www.emarketer.com/content/almost-75-of-bnpl-users-us-gen-z-millennials
[6] Study: Buy Now, Pay Later Services Continue Explosive Growth. The Ascent. 2021. https://www.fool.com/the-ascent/research/buy-now-pay-later-statistics/
[7] The Emergence of Buy Now, Pay Later. Medium, 2021.
[8] https://vm.tiktok.com/ZSd8VE35S/?k=1
[9] Offering Layaways. Federal Trade Commission. N/A. https://www.ftc.gov/tips-advice/business-center/guidance/offering-layaways#4
[10] The Risks of Buy Now, Pay Later Programs. Consumer Reports. 2021. https://www.consumerreports.org/shopping-retail/risks-of-buy-now-pay-later-programs-a1000664957/
[11] Consumer Financial Protection Bureau Opens Inquiry into “Buy Now, Pay Later” Credit. Consumer Finance. 2021. https://www.consumerfinance.gov/about-us/newsroom/consumer-financial-protection-bureau-opens-inquiry-into-buy-now-pay-later-credit/
[12] As ‘buy now, pay later’ surges, a third of U.S. users fall behind on payments. Reuters. 2021. https://www.reuters.com/technology/buy-now-pay-later-surges-third-us-users-fall-behind-payments-2021-09-09/
[13] Rent-A-Center is a ripoff that preys on the poor. NY Daily News. 2009. https://www.nydailynews.com/opinion/rent-a-center-ripoff-preys-poor-article-1.420198
[14] More People Shop According to Brand Values. Futurity. 2021. https://www.futurity.org/brand-values-2569712-2/
[15] Regulators Scrutinize Buy Now, Pay Later Plans. PEW Stateline. 2022. https://www.pewtrusts.org/en/research-and-analysis/blogs/stateline/2022/02/02/regulators-scrutinize-buy-now-pay-later-plans
[16] Changing “Buy Now Pay Later” Regulations & Considerations for Retailers. JDSUPRA. 2021. https://www.jdsupra.com/legalnews/changing-buy-now-pay-later-regulations-5332645/
[17] Banking and Poverty: Why the Poor Turn to Alternative Financial Services. Berkeley Economic Review. 2019. https://econreview.berkeley.edu/banking-and-poverty-why-the-poor-turn-to-alternative-financial-services/
[18] Swatch Checkout Cart. Swatch. N/A. https://www.swatch.com/en-us/THE-FRAME-BY-FRIDA-KAHLO-SUOZ341/SUOZ341.html?gclid=Cj0KCQjwuMuRBhCJARIsAHXdnqPEE65Q-kzvm9NKGpcc9wUSnxpXyW_QeCPtmC5F3KJ7EHU9RXfhc1kaAiFaEALw_wcB&gclsrc=aw.ds
[19] ‘Buy Now, Pay Later’ Users Significantly More Likely to Overdraft Than Nonusers. Morning Consult. 2022. https://morningconsult.com/2022/03/02/buy-now-pay-later-bnpl-overdraft-data/
[20] Afterpay Frequently Asked Questions. Adidas, N/A. https://www.adidas.com/us/help/us-payments/afterpay-frequently-asked-questions
[21] Beforepay, Afterpay and everything in between: Do Australia’s BNPL players have consumers’ best interests at heart?. Smart Company. 2020. https://www.smartcompany.com.au/industries/retail/bnpl-beforepay-afterpay-ethics/
[22] Consumer Financial Protection Bureau Opens Inquiry into “Buy Now, Pay Later” Credit. Consumer Financial Protection Bureau. 2021. https://www.consumerfinance.gov/about-us/newsroom/consumer-financial-protection-bureau-opens-inquiry-into-buy-now-pay-later-credit/
[23] Consumer Financial Protection Bureau Opens Inquiry into “Buy Now, Pay Later” Credit. Consumer Financial Protection Bureau. 2021. https://www.consumerfinance.gov/about-us/newsroom/consumer-financial-protection-bureau-opens-inquiry-into-buy-now-pay-later-credit/
