Pay later, invoice solutions, and instalments – trends, updates, and innovation

In emerging economies, the surge is in part driven by a growing middle-class population, widespread smartphone adoption, and rising internet penetration, which are all set to increase consumer’s shopping power. In developed economies, digitisation and new services that cater to the needs of consumers have led to a rise in consumer preference for deferred payment for online purchases. The preference also stems from the convenience and affordability it provides to pay at a later date, resulting in less frequent cart abandonment and increased online purchases. Pay later, consumer credit, invoice, after pay, or slice it types of solutions also solve the problem of customers that do not want to part with their money until they are sure the goods meet their expectations. Moreover, for some consumers, especially millennials, large purchases cannot be covered by a single paycheck.

Globally, as research by McKinney shows, Sweden has been the focal point in this space, with 60% of the country’s consumer finance market in 2016, compared with 20% in 2001. In other European countries, banks retain a larger share of the consumer finance market. In Germany, lenders control more than 95% of consumer finance volumes, in France more than 90%, while Swedish banks have lost 35% of consumer finance volumes in the past 15 years, capturing over 40% in 2016, according to the same study.

Generally, we distinguish two main types of ‘buy now, pay later’ solutions:

pay later, where the consumer does not pay a fee or interest, just the merchant does (eg instalments by Afterpay, a free service offered by retailers to shoppers; there are no upfront fees charged or any interest incurred); other companies offering this type of solution are Klarna or Splitit;

consumer credit, where instant credit is offered, which allows the consumer to spread the payments; the consumer pays an interest, and there is no fee for the merchant (eg CreditClick: instead of paying immediately the full amount at purchase or at delivery, the company offers consumers the possibility to spread the cost over several months).

POS loans (the consumer credit option), in which online shoppers are offered the option of an on-the-spot ‘buy now, pay later’ loan from a third party as they check out, are available at big retail sites like Walmart, AliExpress, ASOS, JD.Sports, Arcadia Group, Nest, Media Markt, and more. Pay later popularity in retail can be explained by the fact that this sector is notoriously competitive, and consumers’ behaviour is highly versatile. Shoppers have many options to choose from, so if they do not enjoy an optimised service and user experience they simply go elsewhere. The acquisition of technology platform Vyze by Mastercard is likely to increase the already rapidly growing availability of this type of loans and see more retailers introducing financing solutions. Vyze connects merchants with multiple lenders, allowing them to offer their customers a wide range of credit options online and in-store.

Popularity and usage

In Europe, UK consumers have been open and quick to adopt pay later solutions, compared to other European markets like Germany or Italy. A third of UK shoppers perceive retail finance as a convenient way to spread the cost of expensive purchases, and nearly one in five name the availability of different finance options as the most important factor when making big-ticket purchases, according to a study by Divido, a white label point-of-purchase finance platform. When it comes to the typical pay later UK shopper, Divido has found that shoppers in full-time employment are requesting the most credit, followed by self-employed and retired consumers. Of those consumers, most popular duration of credit agreed between a consumer and lender is 12 months, followed by 40 months, and 60 months.

In Germany, open invoice (pay after delivery) is popular in light of to the fact that Germans became used to merchants bearing the cost in advance, they grew up with catalogues and slogans such as ‘try before you buy.’ Paying by invoice is still the most popular payment method in Germany, according to a 2018 EHI study on retail ecommerce in the country. In the country, RatePay offers open instalments and checkout lending solutions for ecommerce, handling the entire payment process and carrying the risk for payment default. In the Western European market, other players like Mash, Divido, CreditClick, and AfterPay are all competing, while in the US, Splitit (which is also present in Europe), Future Pay, Affirm or Uplift are well-known for their pay later solutions.

Chinese websites also enable pay later solutions for western shoppers. It is important to mention the recent Alipay, Adyen, and Klarna’s partnership, initiated in May 2019, which aims to allow shoppers at AliExpress to use Klarna’s Pay later solution. This payment option will help AliExpress shoppers in Germany, the Netherlands, Austria, and Finland to decide when and how they want to pay, with more countries to be added in the following months of 2019.

In the US, McKinsey’s Digital Payments Survey finds that more than 20% of US digital shoppers have pursued a digital POS loan to complete a purchase. Millennials are the most frequent users, but adoption exceeds double digits across all age brackets. PayPal is the most common solution while Swedish challenger Klarna has developed a solid US following among millennials.

Online pay later solutions are gradually appealing to shoppers in Asian markets, with payment service providers and online merchants offering solutions to allow payments at a later date. As GlobalData shows, the rising appetite for short-term financing presents huge potential in Asian markets. The pay later concept is also gaining popularity in countries like Australia and China. AfterPay and zipPay in Australia are offering convenient credit financing options for many online shoppers. In India, online pay later tools provide significant growth prospects for the country’s ecommerce market. Here, LazyPay is well-known for its pay later options offered to more than 250,000 customers in collaboration with Zomato, Swiggy, Foodpanda, Redbus, and Faasos. In addition, Flipkart and cab aggregator Ola have introduced their own deferred payment solutions for loyal customers in India.

In Australia, AfterPay offers an extended pay later option with four equal instalments due every two weeks. The amount gets deducted automatically on the due date from a linked debit or credit card. In New Zealand, PartPay, Oxipay, and Laybuy offer similar services. PartPay allows customers to pay only 25% of the total purchase amount upfront and the remaining in three equal fortnightly instalments via debit or credit card.

Nevertheless, solution providers should be very transparent about interest rates. In the UK, for example, as research from Arrow Global shows, the younger generations have increased the amount of debt they owe over the last five years, many being unaware of how much interest they are paying. The research reveals that 40% of 18-24 year-olds and 46% of 25-34 year-olds have increased the overall amount of debt they owe over the past five years.

Innovation

Machine learning and artificial intelligence

Machine learning technology can be effectively integrated in setting up pay later plans as it allows lenders to determine the creditworthiness of the applicant. Using artificial intelligence, lenders can perform background checks faster and approve loans at a lower risk.

New entrants and new products

PayPal (which acquired BillMeLater – now PayPal Credit), PayU, Square, Yandex.Checkout, PAYFORT have entered this market, capitalising on credit lending for both retail and businesses. Some of these tech companies have a few advantages over traditional lenders, such as low costs and access to transaction data from months or years of activity. The sales data gives them an alternative to traditional credit scores when deciding whether to lend money.

Other companies, such as Fly Now Pay Later or Uplift, offer pay later and instalments for travel services. Fly Now Pay Later, for example, allows customers and businesses to instantly spread the cost of holidays, hotel or trip over a period that suits them. With financing through Uplift, consumers can book their trip, travel on your schedule, and pay over time in convenient monthly instalments.

For a similar offering, Mastercard and Divido have partnered with lastminute.com to offer online checkout financing in the UK. Consumers can take advantage of a new instalment payment solution when booking travel through lastminute.com, giving them greater flexibility on when to pay.

About Ana Pastravanu

Ana is Content Editor at The Paypers and has been actively involved in covering digital payments and ecommerce related topics. She is passionate about finding the latest trends and developments in cross-border ecommerce, payment methods, and fintech startups.

This editorial was first published in our Payment Methods Report 2019 – Innovations in the Way We Pay, which provides a comprehensive overview of the up-to-the-minute trends, updates, and innovations in the payments space worldwide, depicting the key developments in the way people pay.