Merchants See Financially Worry-Free Consumers As Growth Area for BNPL

As the popularity of buy now, pay later (BNPL) continues to grow, the industry is getting a clearer glimpse into the spectrum of users who turn to it for purchases, including an unexpectedly wide — and growing — number of customers who have other credit options but prefer BNPL anyway.

PYMNTS research finds that financially stable consumers with access to revolving credit choose BNPL options more frequently. It may have something to do with the fact that these credit-worthy consumers understand money — and that BNPL is essentially a free loan.

In a new episode of PYMNTS TV’s “On the Agenda,” Karen Webster was joined by Sezzle President Paul Paradis, Bear Mattress CEO Scott Paladini, and Echelon Fitness CEO Lou Lentine, exploring how merchants can use BNPL to capture sales from financially “worry-free” consumers.

Selling luxury beds that can run up to $3,000, Paladini said, “I think [consumers] recognize that 0% interest is basically free money. I’m curious to see how it changes as interest rates rise, but in the current environment it makes financial sense to take advantage” of BNPL financing.

Paradis said, “It differs depending on short term and long term or the ticket size of the purchase, as well as the terms of financing, but I think Scott’s ‘free money’ argument is a good one.”

That financially savvy, credit-worthy, card-carrying consumers are getting wise to zero-interest installments adds a new dimension to BNPL, which in 2021 represented just 3% of retail spend.

For connected home fitness marketplace and Peloton rival Echelon, Lentine said, “We convert about 40% to 50% using [BNPL] financing. At one point we [took BNPL] down and we did see a lower conversion, so it’s definitely important.”

BNPL conversions for Bear Mattress are “around 30%” using multiple providers, Paladini said. Clearly, those who could pay for high-ticket items with credit cards are instead choosing installments more frequently, where they find it offered. They have their reasons.

PYMNTS research finds that among worry-free consumers who have not had a credit card during the past year, 40% avoid cards because they tempt spending; 35% eschew cards due to high-interest rates, and 25% say fees are too high to apply — even though they qualify.

Get the study: The New Credit Model: Why Financially Worry-Free Consumers Still Want Alternatives To Traditional Credit

Matters of Choice

As the field becomes more crowded with players, some are choosing to blaze their own BNPL trail with in-house tech and terms crafted to the particulars of a given business or vertical.

Lentine said “We did our own, Echelon Financing, we partnered with a bank for it, and we can give 0% interest up to 48 months. Unlike our competitors, we also can finance the membership as well with it. That’s a good benefit, and not all finance companies will do that.”

Offering multiple BNPL options “confused the customer and our conversion rate actually wasn’t as good as just offering one,” for the company’s connected bikes and workout gear, Lentine added. A typical Echelon transaction runs $1,300, and he said the company would consider a second BNPL option for lower-priced items like athletic wear “where it’s a $60 average checkout.”

Infrequent large purchases like mattresses and connected exercycles need a different approach to underwriting than fashion, for example, which supports the argument for more choice.

Paradis said “When you’re dealing with a higher frequency of purchases, people are going to want to go to the default payment method that they use every day or every week. I do think it’s going to move to a scenario where retailers need to offer multiple buy now, pay later solutions, just like they [accept] multiple credit card types.”

“My family’s been in the retail mattress business for 30 years,” Paladini added, “and this comes back to what Lou was talking about with 48 months. You can go into some mattress stores and get 84-month financing at 0% interest right now. But the customer profile tends to be strong.”

“Strong” is an apt descriptor for the “worry-free” BNPL consumer, who, according to PYMNTS research, is 52 years old, has a 768 credit score on average and earns more than $50,000 a year.

Read more: BNPL User Personas Proving That Installments Have Value Beyond Instant Gratification

Ubiquity and the Future

As BNPL expands into pricier merchandise and longer payment terms, merchants are eager to get the optionality balance right. That’s a test-and-learn exercise to some extent, as different types of merchants analyze BNPL usage over time to see where the best action is.

With BNPL known to improve everything from cart size and customer experience and loyalty, Echelon’s Lentine is focusing efforts on prequalifying more “worry-free” users to spur usage.

“When you do work with third parties,” Lentine said, “you’re kind of at their whim if they approve or decline and if that doesn’t happen, we don’t really know why or how we can help that customer.”

Paradis agreed, saying “What we’re working toward as an industry, and as an individual provider at Sezzle, is how can [we] allow consumers to use us everywhere, not just the merchants that we have a direct relationship with?”

Once that’s solved, Paradis expects more convergence between BNPL and more traditional credit cards and other financial offerings — offering consumers “pay now” as a feature, perhaps, or letting them refinance onto longer-term installment loans.

“We see those customers that have good financial strength still buying [with BNPL],” Paladini said. “What it does do is provide them with all the flexibility in the world to decide how they want to pay, when they want to pay, etc. When you’re in good financial standing, that gives you a whole lot of options.”