A major goal of conversion rate optimization (CRO) is to lower the barrier to making purchases. We try to understand why a customer comes to our website and what factors might influence their decision-making, so we can remove unnecessary obstacles and alleviate concerns. One of the few obstacles we can't remove is that customers really do have to pay in the end. Can that be made more fun? No. But can it be made easier.

Buy Now Pay Later

Pay later? Pay in installments? It has become commonplace to make online purchases this way. Less friction, faster payment. More and more Buy Now Pay Later (BNPL) services are therefore being offered, with Klarna and Riverty (formerly AfterPay) as the main providers in the Netherlands. Now that the services have been available on the market for some time, it is becoming increasingly clear that, in addition to the benefits, there are also risks associated with using BNPL. In this 2-part blog, we discuss the benefits and risks of BNPL; why we as humans love to use it and what we can do to protect consumers from themselves.

The benefits of BNPL

BNPL is almost impossible to imagine e-commerce without. The reason for its growth is due to the many benefits it offers, both for consumers and providers.

For consumers:

• Convenience and flexibility: It is an alternative to credit cards without interest or credit checks.
• Budget Management: Consumers can afford things they can't otherwise pay for at once, and it helps with improving cash flow by spreading out payments.
• “Try before you buy”: This protects consumers from bad purchases (Credit Karma, 2021).

For providers:

• Increased sales conversions and average order value (AOV): Customers buy faster and spend more if they can pay later.
• Competitive Advantage: BNPL services can provide a competitive advantage when other parties do not offer the services.
• Psychological influence: Partnering with a well-known BNPL provider can increase customers' trust in the online store (AFM, 2022; Ariffin, Mohan & Goh, 2018).

Why do people consume more with BNPL?

The practical benefits are obvious. But what is interesting is that consumers not only make their purchases in a smarter way, but actually make more purchases. Looking at the psychological literature, we have a few explanations for this.

Paying hurts
For starters, people are loss averse (Kahneman & Tversky, 1979) and paying hurts psychologically (Skwara, 2023). The option to pay spread out or afterwards makes that blow less felt.

Purchasing feels risky
In addition, online transactions are associated with uncertainty because consumers cannot physically examine the product before buying it, leading to an increased perception of risk (Eggert, 2006). BNPL's “try before you buy” option provides an increased sense of safety by leaving the potential loss out of the equation for a while. This allows the customer to make a purchase that they may have previously felt less comfortable with.

The endowment effect
Next, the endowment effect can occur. People tend to attribute a higher value to the items they own (Kahneman, Knetsch & Thaler, 1990). When customers receive their ordered products through BNPL, even before they have made payment, they become more attached to the items. As a result, they are less likely to return items.

Present bias & hedonic framing
In addition, human decision-making is also influenced by present bias, a phenomenon that causes self-control problems because we prefer immediate gratification to long-term positive effects (Bizzarri, Mocenni & Tiezzi, 2023). This bias may cause people to spend more impulsively and prefer to use BNPL services to finance their impulsive purchases. In addition to instant gratification, BNPL also offers convenience and speed. It has strong hedonic benefits that the platforms themselves play hard on (see, e.g.. Klarna).

Conclusion

BNPL services offer numerous benefits to both consumers and providers. They make it easier to make purchases, increase sales conversions and provide psychological benefits that contribute to a positive shopping experience. But the appeal of BNPL is not without risks. Lowering the threshold to buy products can be pleasant, but it can also be dangerous. For example, we see many dark patterns emerging online around BNPL, patterns that particularly victimize vulnerable groups.

Curious about the dark side of BNPL services? Stay tuned for the next blog in which we discuss the drawbacks, ethical aspects and our responsibility in using them.

References

AFM (2022). Buy Now, Pay Later: Exploring a new trend.

Bizzarri, F., Mocenni, C., & Tiezzi, S. (2023). A Markov Decision Process with Awareness and Present Bias in Decision-Making. Mathematics, 11(11), 2588.

Eggert, A. (2006). Intangibility and perceived risk in online environments. Journal of Marketing Management, 22(5-6), 553-572.

Kahneman, D., Knetsch, J. L., & Thaler, R. H. (1990). Experimental tests of the endowment effect and the Coase theorem. Journal of political Economy, 98(6), 1325-1348.

Kahneman, D., & Tversky, A (1979). Prospect theory: An analysis of decisions under risk. Econometrica, 47, 278.

Kamalul Ariffin, S., Mohan, T., & Goh, Y. N. (2018). Influence of consumers’ perceived risk on consumers’ online purchase intention. Journal of research in Interactive Marketing, 12(3), 309-327.

Karma, C. (2021). Buy now pay later surges throughout pandemic, consumers’ credit takes a hit. Credit Karma.

Skwara, F. (2023). Effects of mental accounting on purchase decision processes: A systematic review and research agenda. Journal of Consumer Behaviour, 22(5), 1265-1281.