Voice of the Industry

A 4-step guide to BNPL strategy for merchants

Monday 4 October 2021 08:13 CET | Editor: Raluca Constantinescu | Voice of the industry

Martha Southall, Economist at CMSPI, analyses the merchant perspective, providing pointers on how retailers can make the most of the BNPL opportunity without succumbing to its pitfalls

The global buzz around Buy Now, Pay Later (BNPL) has left no party in payments untouched. Its rapid expansion has drawn the attention of regulators, merchants, news outlets, fintechs, and traditional banking players alike. It’s no surprise, either; BNPL is now one of the fastest-growing payment methods across Europe, the US, and Asia–Pacific.1 

In all this publicity, merchants – the crucial party in bringing BNPL to retail customers – can be left behind. In trying to navigate the BNPL landscape, they can find themselves caught between high fees, regulatory uncertainty, and suppliers promising a host of benefits that can be difficult for merchants to verify. In this article, we take up the merchant perspective, asking how retailers can make the most of the BNPL opportunity without succumbing to its pitfalls. 

Building a BNPL strategy 

Many merchants feel it is increasingly necessary to accept BNPL. However, in a rush to integrate the payment method their consumers expect, they may miss the opportunity to build a long-run strategy that promotes healthy competition in their supply chain. In the first part of our BNPL series, we outlined the potential pitfalls of this approach through some key lessons from the Australian market – from reducing debit card volumes to increasing the likelihood that transactions fail. 

In reality, there is a lot that merchants can do to regain control of their BNPL strategy. For some merchants, developing productive relationships with their BNPL partners means integrating multiple suppliers, allowing them to spread risk whilst driving competition on fees. For others, it means integrating closely with one partner to smoothen the checkout experience and reap the cost and marketing benefits of exclusivity. Both options require consideration of long-run factors such as customer loyalty, which needs to stay with the merchant rather than shifting towards an external provider over time. In this article, we focus on the revenue benefits of BNPL, asking how merchants can validate the claims of their new payments partners. 

Step 1: Know your customer base 

BNPL providers’ offers to merchants typically coalesce around three main value-adds: higher average basket sizes, greater online conversion rates, and exposure to a broadened consumer base. But as a merchant, how do you know this increased exposure is to the right market? 

There is often a perception that the BNPL ‘sweet spot’ lies with younger consumers and the apparel sector. Whilst that may hold partly true for providers such as Zip (see Figure 1), the likes of Openpay deliberately position themselves outside of ‘fast-moving retail’ and prioritise verticals such as healthcare.2 For consumers, that can mean lengthier repayment plans of higher value, likely attracting a distinctive demographic and potentially translating into different terms in a merchant’s contract. 

Figure 1. Zip Co Australia presence by vertical3 

When choosing their providers, then, merchants need to be aware of how a suppliers’ target demographic aligns with their own. This can help in forecasting the potential uplift to conversion rates, as well as predicting contract terms around factors such as risk (ensuring, for example, sufficient credit checks for their new customers). 

Step 2: Make every conversion count 

Even with a perfectly aligned customer base, boosting a merchants’ conversion rate (i.e. the frequency with which a consumer clicks ‘Pay’) does not guarantee increased revenue. For that, those new transactions need to be approved. CMSPI finds that, across all payment methods, many are not – even when they’re made by good, non-fraudulent customers with sufficient funds. These ‘false declines’, according to our estimates, constitute 1 in 5 payment declines online – a figure that can be even higher for BNPL for some merchants (see the first part of our BNPL series). 

The distinction between approvals and conversions was illustrated clearly to merchants at the start of the pandemic. As Figure 2 shows, while the average ecommerce conversion rate increased with the onset of global lockdowns in 2020 (as merchants worked overtime to optimise their online offering), our data suggests that average approval rates dropped significantly. That’s not just due to the greater complexity of authentication online; it also reflects issuers struggling to onboard and gather data on consumers who had never shopped online before, and declining more good transactions as a result. 

Figure 2. Average approval rate and average ecommerce conversion rate4 

The pattern in Figure 2 shows the importance of approvals and conversions working in tandem, and it makes the former a top priority for merchants implementing BNPL. Gathering this data is crucial to empower direct collaboration with BNPL providers, creating the grounds for negotiation over factors such as risk parameters which improve merchants’ ability to generate new (safe) sales. 

Step 3: Assess your transaction productivity 

The importance of structuring every negotiation around data is true for any payments decision. It’s particularly true when looking at revenue potential; BNPL providers themselves would agree that focusing on cost alone will not allow a merchant to reap the method’s full benefits. 

However, for merchants, the high cost of BNPL (often one of the most expensive payment types on the market) makes it even more imperative that other benefits are realised. That means developing analytics during the pilot phase that track average basket sizes, approval rates, and the incrementality of sales using BIN-level data. These metrics help in calculating what CMSPI terms a transaction’s ‘productivity’, which balances cost and realised revenue increases to compare gross profitability across payment methods. Equipping yourself with these insights can provide the basis for productive conversations with suppliers, who often have little visibility over competing parties that may be charging merchants less for the same results. 

Step 4: Stay one step ahead 

Even for those who are yet to implement BNPL, one thing is for sure: the only mistake a merchant can make is failing to prepare. In fact, as providers shift into e-wallets and virtual cards, merchants (even those with an in-house financing offer) may find that they’re accepting BNPL without even realising it.5 They’ll need to watch closely as the market tends towards its final equilibrium – be that one in which mammoth mergers such as the Square–Afterpay deal create a consolidated landscape, or where consumer adoption hits critical mass and BNPL becomes a staple of the payments mix. Regulators have the potential to shake up the landscape, too, with intervention that levels the playing field for traditional credit products. Merchants set to make the most of the BNPL trend – short-lived or otherwise – are those with sight over each of these developments, who protect their consumers from the outset, and who use their data to empower every conversation. 

In the first article of CMSPI's BNPL series Martha Southall presents three key lessons from Australia that US and European merchants need to hear before navigating their own BNPL strategy.

  1. Worldpay Global Payments Report (2021)

  2. See Openpay (2021). FY21 Investor Presentation. Available at: https://investors.openpay.com.au/site/PDF/6b52d7aa-5213-4e2e-a95d-cb3efe6a8913/FY21ResultsPresentation 

  3. Zip Co (2020). Annual Report. Available at: https://zipco.colliercreative.com.au/wp-content/uploads/2020/10/ZPC0007_Zip_AR20_PFOb_web.pdf

  4. Approval rate data from CMSPI proprietary data. Conversion rate data from Contentsquare.

  5. See Klarna’s UK offering which allows shoppers to use its services even with non-partner retailers: https://www.chargedretail.co.uk/2021/06/07/uk-klarna-shoppers-can-now-use-its-bnpl-service-on-any-online-store-regardless-of-partnerships/

About Martha Southall 

An Economist at CMSPI as part of its ‘Insights’ team, Martha’s focus is tracking payments market trends, as well as reporting on emerging payments issues and regulatory changes. 

About CMSPI 

CMSPI is an independent, data powered, global consultancy advising merchants on how to improve the productivity of their payments arrangements by reducing costs, increasing sales and implementing innovative solutions.

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Keywords: CMSPI, BNPL, merchants, retail, ecommerce
Categories: Payments & Commerce
Countries: World
This article is part of category

Payments & Commerce