“Buy Now, Pay Later”:music to consumers’ears

15/11/2023

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Buy Now, Pay Later: What has been a mainstay on the American market for decades is now becoming a global phenomenon. As its name makes quite clear, this type of payment enables the purchase of goods or services in installments, or in full at a later date (usually within 90 days). And consumers are loving it. We sat down with Bertrand Pineau, Managing Director of Mercatel, a think tank created by companies in the retail and distribution sector.

An estimated 60% of Europeans use it, and one in four Europeans say they prefer sites that offer it. The global split payment market quadrupled between 2018 and 2020 to reach $80 billion (Kaleido Intelligence). It could triple again by 2025 to 250 billion.

Buying with “free” credit: a relationship based on trust?

One interesting case to study is the French, who have had their own long-term relationship with credit. From the late 1950s and into the 1970s, credit purchases accounted for 20-25% of [1] total consumer spending. A hallmark of the “unbanked” working and middle classes, it testified to the mutual trust between local retailers and their customers.[2]

Running up a tab in the neighborhood – “dark credit” as the Banque de France called it at the time – was nothing out of the ordinary [3]. A sense of community and mutual acquaintance made this “free” credit particularly easy, accessible and low-risk. “But the formalization process undoubtedly began in earnest in the 1980s,” explains Bertrand Pineau. “Mail-order players such as La Redoute, les 3 Suisses, Damart and others were the first to market this solution on a wide scale by offering it to all their customers.”

Splitting payments: a growing trend

The exponential growth of e-commerce in the 90s and 00s provided even more fertile ground for this payment solution. “We’ve been talking about the modernization of e-commerce and cross-channel sales for 15 years, but what has really accelerated these trends is the pandemic: with the rise in online transactions and purchases, the payment process has been transformed. Long considered a cost item by retailers, it has now taken on a new role in their strategy. Just like product innovation, it has become a high value-added service that contributes to making the shopping experience more fluid, easier and even more experiential. It has become an asset in customer relations, and this has naturally led to changes in consumer habits.”

Installments: a win-win situation

Because “it is not, in the current state of the law, considered́ as consumer credit”, split (or “fractional”) payment offers great flexibility to all players. “For customers, it means they can spread out their spending and better control their budget, while gaining access to more products and services, especially in an inflationary crisis context such as today’s.

It boosts retailers’ competitiveness by encouraging them to innovate and create ever smoother, more intuitive customer journeys. Fractional payment offers are now flooding the market, enabling consumers to split up their payments once the product has been purchased. These solutions obviously boost sales by making more onerous purchases possible for consumers [4].” When split payments are offered, it is estimated that the value of the average basket increases by 20-70%, depending on the sector of activity: “It’s a simple, transparent solution for everyone,” concludes Pineau.

But this momentum is also attracting the attention of regulators. And rightly so, since it exposes consumers to increasing risk of over-indebtedness. Yet, according to our expert, “European regulations on this matter are set to change, with the revision of the consumer credit directive soon to be adopted.”

Technological innovation for smoother, more intuitive payment solutions

The Payment Services Directive 2 (also known as PSD2) has also helped make e-commerce payments more secure, by strengthening consumer authentication, particularly for split payments. It has also opened up access to payment account data held by banks. “Fintechs can use this data to continue innovating with new payment solutions, such as direct debits,” explains Bertrand Pineau. PSD3 and its associated regulation, the first drafts of which have just been published, will push innovation even further by harmonizing the implementation of these provisions across Europe.

Another project is the European Payments Initiative (EPI), which in June 2024 will launch a new payment solution based on instant transfers (and therefore independent of card networks).

It is set to add split payment journeys to its e-commerce and retail offering from 2025.[5] “This solution is undergoing significant development elsewhere in the world (India, Brazil, etc.), and is already well established culturally in Germany and the Benelux countries, where people are historically less likely to use bank cards than in France. The development of instant transfers, combined with open banking, should also facilitate inter-company payments in the B-to-B market, which until now has been the ‘sick man’ of payment facilities,” enthuses Mercatel’s Managing Director.

But one thing’s for sure: opinion isn’t split on the potential of fractional payments.

[1] Centre de recherche pour l’étude et l’observation des conditions de vie (Crédoc), in the Introduction to Le crédit direct des commerçants aux consommateurs : persistance et dépassement dans le textile à Lens (1920-1970)

[2] In Richard Hoggart’s Introduction to Le crédit direct des commerçants aux consommateurs: persistance et dépassement dans le textile à Lens (1920-1970), this behavior even helped to define the “cultural boundaries of the working classes” (1970: 43-46).

[3] Boltanski and Chamboredon, 1963, quoted in the Introduction to Insert a tag Le crédit direct des commerçants aux consommateurs: persistance et dépassement dans le textile à Lens (1920-1970)

[4] https://www.bfmtv.com/economie/entreprises/oney-le-boom-du-paiement-fractionne_AO-202205130007.html

[5] Available in June 2024 for consumers, in 2025 for e-commerce players, and in early 2026 for local retailers.