LONDON, United Kingdom — "Charge it." That was once the refrain for a young generation of shoppers who came of age when credit cards were the answer to coveted items they couldn't quite afford. But the psychological fallout of the Great Recession and a host of new "Buy Now, Pay Later" services are rewiring the buying behaviour of today's young.
"When it comes to income, the Great Recession has left them with lower incomes than previous generations, which has made them weary of taking on too much debt," explained Michelle Grant, head of retailing at Euromonitor International. "They're very conscious of how they spend because of the high interest rates that credit cards usually entail."
A new wave of fintech startups are providing alternative solutions, partnering with retailers to give consumers greater flexibility around e-commerce payments. In the US, Affirm lets shoppers split the cost of payments into smaller, fixed instalments with no hidden fees and no interest when used at select smaller retailers, like direct-to-consumer men's shoe brand Paul Evans; other fashion retail partners include Tradesy, Rebecca Minkoff and Tamara Mellon. In the UK and Europe, Klarna offers "Slice It" interest-free, pay-in-instalment options. Specific to the UK market is its "Pay Later" service, where shoppers are given up to 30 days after purchase to complete payment, with no interest or additional fees; recent fashion retail partners include Arcaida Group brands — including Topshop and Miss Selfridge — as well as Asos.
These new services feel psychologically different to credit cards, say experts. "Consumers feel less connected to the financial side [of the purchase] and much more to the brands that they like," asserts professor Carolyn Mair, founder of consultancy firm Psychology.Fashion. "Emotionally it feels so different," agrees Kit Yarrow, consumer psychologist and author of "Decoding the New Consumer Mind." Flexibility around payment, rather than expecting funds upfront, can communicate a sense of trust in the consumer. "One feels like the retailer is in control, and the other feels like the shopper is in control."
Consumers feel less connected to the financial side of the purchase and much more to the brands that they like.
Heightened consumer expectations are helping driving innovation. "People are less and less willing to pay for what they consider a service," says Yarrow. She points to free shipping as an example of something that is expected nowadays. "People look at shipping fees as an additional charge to buying something, which they don't feel they should have to pay. I think the same is true for interest."
"Consumers are becoming more demanding," agrees Tamara Sender, senior fashion analyst at Mintel. "They want increasing options when shopping for clothes. This includes payments." This is particularly true of younger shoppers. According to Mintel data, 48 percent of females aged 16 to 24 are drawn to Buy Now, Pay Later options.
Young consumers are also less committal than previous generations. "[Young] people make a temporary commitment to [a purchase] and it isn't until they've gotten it into their home and thought about it some more, matched it up with their wardrobe and decided whether they can really afford it, that they decide whether or not they're going to keep it," explains Yarrow. "[With Pay Later] the merchant is separating the actual buying from the paying, which removes uncertainty [for the customer] around the product being correct for them," agrees Luke Griffiths, vice president and general manager at Klarna.
For retailers, these services can pay off. Yarrow notes the significance of how flexible payment schemes can give consumers a sense of trust and control. "We're in this era of abysmal levels of trust," she says. "If you can gain that, you win everything — not just a little bit more loyalty, but consumers will try new things, they'll take your advice on things."
Certainly, flexible payment options, in particular Buy Now, Pay Later services, have a knock-on effect on purchasing behaviour, with average order values (AOV) often increasing. Klarna's Griffiths says he sees shoppers returning more frequently, with an increase in transaction volume. This is also thanks to the removal of friction at the point of purchase.
"That's one of the biggest reasons people abandon a cart, especially if you're shopping from your phone," says Grant. "With the Millennial generation pretty much being mobile-first, it's very crucial to deliver a great mobile experience, where traffic is higher, but conversion rates are much lower because of friction in mobile." Fintech companies like Klarna and Affirm optimise their checkout system for mobile, meaning that, as with a desktop, minimal information is required to complete a purchase. Interestingly, Asos offers its Buy Now, Pay Later service exclusively on its mobile app.
London-based fashion company AQ/AQ was one of the first UK clients to partner with Klarna to offer their customers Pay Later, which went live in October 2015. In the first three months of offering the service, the business saw an 18 percent increase in conversions and a 10 percent increase in overall revenue. "It's super important to just remove all barriers from the checkout flow and experience of purchasing," asserts technical director Beren Gamble. He says AQ/AQ was so pleased with Klarna's slick checkout solution that it has now switched off its old checkout system, processing all payments through Klarna.
It's super important to just remove all barriers from the checkout flow and experience of purchasing.
Other retailers that have partnered with Klarna have seen similar successes. Arcadia — which introduced Klarna's Slice It financing across all its brands in September 2017, expanding this to include Pay Later in November 2017 — saw AOV increase by 80 to 90 percent when compared with other payment types. British label Finery saw basket values grow by 15 percent, while items per basket grew 20 percent; 25 percent of Finery customers use Klarna to pay in favour of a credit or debit card. Gen-Z-focused brand Hype saw AOV increase 40 percent, with online were conversions up by 38 percent.
Luxury consignment site Vestiaire Collective's flexible payment services focus on interest-free instalment options, partnering with companies Split It and Afford It Now in the UK, and similar providers in other markets. The company first introduced flexible payment options to the French market in 2016. "Credit card usage is not as prolific [in Europe] as it is in the UK and the US," says Ceanne Fernandes-Wong, chief marketing officer and vice president, EMEA. She says that its success prompted Vestiaire to introduce the initiatives across other key markets. "We see customers shopping higher price points than they would without it, a positive impact to revenue and AOV." According to Fernandes-Wong, nearly 90 percent of Vestiaire Collective shoppers who choose financing solutions say that it triggered their purchase.
She notes, however, that it's not just young, aspirational customers who she sees adopting Vestiaire Collective's flexible payment offerings. "In the UK, we see usage skewing slightly more toward Millennial customers, but in markets where credit cards aren't as prevalent, it's a cross section. I've had customers using it to buy €5,000 handbags."