Online retailers are increasingly offering more payment options to consumers in a bid to make it easier for them to complete a transaction. As consumers grow increasingly mindful about where and how they spend their money, several companies plan to overhaul the shopping experience with alternative payment services to cash and traditional credit.
The market competitors all offer subtly different services, with the most common being to split the payments into four equal installments. Unlike traditional credit issuers, these companies don’t charge interest and instead make the bulk of their income from service fees paid for by participating retailers. Although consumers will pay the same amount for the item over time, they need only pay one installment upfront to complete the purchase and receive their item.
“Installment payment plans lead to lower cart abandonment at the point of checkout, as the initial payment is just a quarter of the full price,” said Nick Molnar, CEO of payments platform Afterpay.
The option to pay in installments is visible on the product page, so customers are aware as soon as they start browsing. Some services can divide a purchase into even smaller payments, with platforms like Splitit offering up to 12 installments. Plans with a higher number of payments tend to be used less frequently, but they do allow younger shoppers to access luxury goods in a more budget-friendly way. (Two out of three millennials don’t own a credit card, and as a result, they can’t tap into an existing line of credit.)
The third service provided is the buy-now, pay-later model that Klarna offers alongside its installment plans. In today’s age of online ordering, many consumers are still returning a substantial portion of their purchases — and taking the financial hit until a refund hits their bank account. Through buy-now, pay-later, a consumer has 30 days to decide if he or she likes the item before being required to pay, which encourages purchase completion.
“Options like pay later give shoppers the control and purchasing power they need to get what they want, when they want it,” said Michael Rouse, chief commercial officer at Klarna. “Through payment offerings that put the consumer in financial control, merchants can stay ahead of the pack.”
However, while all these platforms are set up to work with a customer’s debit or credit card, they vary in their perspective of traditional credit. For instance, Afterpay positions itself as an alternative to credit and is designed to attract the interest-fearing shopper; Sezzle, meanwhile, sees itself as a gateway for people looking to establish credit but who aren’t sure how.
“Our competitors view their solutions as replacements for traditional credit, but we view our solution as an entry point into credit that fixes what is currently a broken pipeline,” said Chris Dolan, VP of strategic partnerships at Sezzle. “Our goal is to graduate our users [to a point where they] build their credit scores.”
There has been some concern that these services, which charge late fees and penalties, encourage customers to buy items they can’t afford, in the hopes that they will be able to pay later. Critics argue that they provide a new way for vulnerable shoppers to plunge into debt, as opposed to being an actual budgeting tool.
But Afterpay reports that 80 percent of its community has never incurred a late fee and 93 percent of purchases are paid for on time. All the companies evaluate each purchase before approval, with penalties ranging up to account suspension until an item is fully paid to prevent any abuse of the service. Sezzle also provides the option to reschedule a payment without incurring an additional fee, should a consumer’s circumstances require it.
For retailers, the risk is minimal, as the payment companies cover the cost of the purchase up front. Offering multiple payment options has led to higher sales conversions, according to the annual Checkout Conversion Index created by PYMNTS.com.
“Providing a simple, flexible and seamless checkout experience is probably the No. 1 thing merchants can do to influence conversion and customer satisfaction,” said Dolan. “If a merchant isn’t offering a pay-over-time solution, they are missing out on sales.”
As e-commerce channels account for a growing number of sales — and millennials and Gen Z flex their purchasing power — more retailers are implementing a payment plan service. Consumers have been quick to adopt the new platforms: Klarna has 60 million shoppers using the service, while 87 percent of Sezzle users would choose it as their payment method of choice if offered everywhere.
“As payment technology evolves, so too do consumer expectations about the checkout experience,” said Rouse. “Not having a standout mobile browser or an easy checkout experience will damage retailers’ bottom lines.”
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