The Buy-Now-Pay-Later (BNPL) system is gaining traction globally as a favoured method of payment. It allows customers the convenience of distributing the cost of their purchases into interest-free instalments over several weeks or months. In 2023, global expenditures via BNPL reached a staggering $316 billion and are projected to rise to $450 billion by 2027. Renowned retailers such as Walmart and H&M are collaborating with prominent BNPL providers like Affirm, Klarna, and Afterpay, which has led to more than 45 million U.S. consumers adopting this payment method.

When customers opt for BNPL instalments at the checkout of participating retailers, the full amount is initially covered by the BNPL provider. The consumer then pays the first instalment at the point of purchase and completes the remaining payments without interest for a brief period.

Despite its increasing adoption, BNPL’s effect on retail sales remains underexplored. A recent study published in the Journal of Marketing utilises transaction data from a major U.S. retailer to demonstrate that BNPL instalments significantly enhance consumer spending. By breaking down payments into smaller, manageable chunks, BNPL increases the frequency of purchases and the average transaction value.

This study examines the effects of BNPL compared to traditional payment methods like upfront and delayed lump sum payments, showing consistent spending increases across various products and instalment plans. Whether consumers are buying party supplies, apparel, or airline tickets and splitting the cost into three, four, or six payments, BNPL consistently encourages higher expenditures.

One key finding of the study is alleviating perceived financial constraints through BNPL. The research suggests that BNPL instalments enable customers who typically rely on credit cards and purchase smaller baskets to feel less financially restricted. The mental accounting of smaller, individual payments (“four instalments of $15”) as opposed to the total cost (“$60 total”) appears less daunting, encouraging more significant expenditure. Additionally, BNPL helps consumers manage their budgets more effectively by focusing on shorter time frames, which contrasts with the longer-term focus required for traditional credit card payments.

Professor Maesen points out that BNPL’s psychological impact, making payments seem less costly and giving consumers better budget control, significantly reduces financial constraints, leading to increased spending.

This study contrasts with prior research by not only focusing on the framing of prices but also on the actual payment practices. BNPL’s structure requires customers to make payments over specified periods, thus extending the research into the practical implications of how payment segmentation affects consumer behaviour over time. This comprehensive approach allows for a deeper understanding of consumer spending patterns, especially regarding their previous spending habits and credit usage.

This research offers valuable insights for chief marketing officers. Consumers using BNPL will likely feel more in control of their finances, which can translate into more frequent and larger purchases. According to Mr Ang, retailers see a notable benefit, with instalment payments boosting transaction frequency by about 9% and amounts by approximately 10%.

Moreover, policymakers and societal stakeholders need to consider BNPL’s substantial influence on consumer spending to craft regulations that balance consumer protection with financial flexibility. This balance is essential as BNPL continues redefining the shopping experience, offering opportunities and challenges in the retail sector.

In summary, the BNPL payment method not only changes how consumers approach their finances but also significantly benefits retailers by increasing the frequency and size of consumer purchases. Understanding these dynamics is crucial for all stakeholders in the retail and financial sectors as they navigate the evolving landscape of consumer finance.

More information: Stijn Maesen et al, Buy Now, Pay Later: Impact of Installment Payments on Customer Purchases, Journal of Marketing. DOI: 10.1177/00222429241282414

Journal information: Journal of Marketing Provided by American Marketing Association