The deferred payment market is heating up

Today’s deferred payment solutions – a broad category covering instalments, ‘Buy Now, Pay Later’, point-of-sale financing, and others – are the evolution of ones born amid the Great Depression to encourage spending during tough financial circumstances. Financing has been a popular way for consumers to pay for higher-ticket items like appliances, particularly in stores since then. But solutions are now also available for smaller-ticket items across a vast range of categories, mainly online. The value proposition for these newer deferred payment providers include: 

Higher site traffic and average order values – Merchant fees for deferred payments can be up to three times that of a credit card transaction. The upside: merchants are likely to experience higher traffic due to the branding and marketing efforts of the providers, as well as a boost in average order values, because consumers can break a larger purchase into smaller increments over time. 

Better customer experiences – For deferred payments, consumers are often subjected to a ‘soft’ credit check versus a hard one for other financing methods, shielding them from any dings to their credit score. And compared to legacy financing processes, many newer solutions have relatively simple-to-understand terms that in turn protect customers from potential negative experiences. 

Digital-first offerings – Though they’re now also expanding offline, many of the newer solutions were originally designed outright for ecommerce: in online or mobile self-service scenarios and with the digitally fluent consumer in mind. Pared down applications with user-friendly interfaces are more common than lengthy paper applications. In fact, Forrester found that digitally native challenger brands are more likely to offer deferred payments at online checkout. 

Appealing to younger shoppers – but consistent adoption across age groups – Although usage is still quite low across all customer segments, interest in deferred payments skews younger: around half of US Gen Z and Millennial consumers are interested, while it drops off for older consumers. However, adoption of these payment methods is quite consistent across all age groups: 5% of US Gen Z consumers have used them, and 4% of each other age group has. 

One sign that this market is accelerating is interest from established payment giants. Over the years, Forrester has seen that the presence of even one or two of these players in any given market helps legitimise the entire product area. In new, simplified deferred payment offerings, at least four of the giants have entered the market: PayPal, Mastercard, Synchrony, and Visa are all enhancing their existing credit offerings to go head to head with the emerging players. The market is undergoing other fundamental shifts, including: 

VC funding skyrocketed in 2019 and 2020 as the market gained momentum – More than half of the deferred payment market funding occurred within the past two years. Across 29 companies Forrester evaluated, 2019 brought USD 1.77 billion in venture capital (VC) funding, and an additional USD 1.86 billion came in the first three quarters of 2020 alone. Average annual investment across the nine previous years came in at a comparatively paltry USD 291 million.

Key players use acquisitions of smaller vendors to extend their geographic reach – To break into the US market, Australia-based Zip Co completed its acquisition of US-based QuadPay in September 2020. In 2018, Afterpay expanded from its Australian origins to the UK by acquiring ClearPay and most recently acquired Indonesia-focused EmpatKali and Spain-based Pagantis. Sweden-native Klarna has also acquired a few companies, including Germany-based Sofort in 2013, BillPay in 2017 (another German player), and the Italy-based payment company Moneymour in 2020. 

The US market is saturated, but adoption is highest in Australia and the Nordics – While the US is home to the most vendors, adoption is higher in Europe and Australia. Founded in 2005, Sweden-based Klarna — now present elsewhere in Europe and the UK, the US, and most recently Australia — was one of the first players to enter the ‘Buy Now, Pay Later’ space. Klarna is still the top digital payment method in its home country: 57% of online adults in Sweden have used it in the past three months to pay for a purchase. In Australia, 13% of online adults have used Afterpay in the past three months to purchase products or services.

Beyond geography and terms offered, differentiation exists in small ways – The main differentiation today is the geographical presence and the terms offered. Other differentiators exist, like whether the solution is customer facing (e.g. Afterpay, Klarna) or white-labelled (e.g. Bread, LimePay, Mastercard) or whether it has an industry focus (e.g. Uplift, LaterPay). The vendors also compete on the level of flexibility they can extend to consumers. For example, Afterpay lets consumers delay some payments without accruing fees, QuadPay lets consumers exceed approved loan amounts for a higher upfront payment to boost usage or use a virtual Visa card to enable in-store usage, and Sezzle has a credit-building offering for its users.

Deferred payment solutions in countries like Australia, Germany, and Sweden have reached critical mass and, in some cases, have surpassed other longer-standing alternative payment methods. But elsewhere, adoption is still in the early stages: only 2% of US and UK online adults have used Afterpay in the past three months, while even fewer — 1% in the US and 3% in the UK — have used Klarna. But Forrester predicts that consumer adoption of deferred payments will as much as triple as recession-conscious consumers look to stretch their dollars and avoid credit card fees.

This article is part of the Payment Methods Report 2021 – Latest Trends in Payment Preferences, a comprehensive overview of the payment methods in scope for 2021, as well as best practices for checkout optimisation and customer conversion by addressing digital transformation, security, and localisation.

About Lily Varón

Lily Varón is a senior analyst at Forrester Research. Her research focuses on the merchant payments processing landscape, evolving consumer payments behaviours, and how merchant payments acceptance strategies must adapt to serve them. 

About Forrester

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