Take Advantage of Buy Now, Pay Later and Enjoy Discounts Forever

Shoppers can be offered various types of discounts to incentivize them to purchase.

Retailers have been utilizing discounts as a part of their early holiday season, with Cyber Monday offering a peak of 25% off listed prices for electronics, which is a significant increase from the 8% discount from the year prior, according to Adobe's annual analysis. This is likely due to the reports of excessive inventory levels at many retailers. However, while discounts can be effective, they can also be damaging to a brand and create consumer expectations of constant sales.

An effective way to offer discounts is to provide attractive financing options, such as "buy now, pay later" which is a type of short-term credit that allows customers to pay for their purchase in installments, but the merchant receives the full payment upfront. According to a survey conducted by PYMNTS in November, more than 10% of Black Friday online shoppers used BNPL, which is an increase from 8% in the previous year and 4% two years ago. In some cases, merchants pay higher transaction fees for this type of financing than they would for traditional payments.

The increasing popularity of buy now, pay later (BNPL) services may be seen as a sign of consumer financial health, as more people are opting to spread out payments for even minor purchases. This is also a reflection of the product's appeal to both banks and stores, as banks are becoming more stringent with credit-card lending and stores are looking for ways to increase sales.

Much of the discussion surrounding buy now, pay later revolves around the potential for consumers to default on payments and the cost of financing. These are both important factors, but they do not provide a complete picture of the business without taking into account how it is priced for both consumers and merchants.

Credit cards are currently charging their highest interest rates in many years, with an average of 19.6%. For those with bad credit, the average rate is even higher at 28%. This could lead to more people being willing to pay more for buy now, pay later services, such as Affirm Holdings.

Recently, the company reported that its portfolio of simple interest-bearing offerings have average interest rates in the high 20% range.

An alternative way to price the service is to set a higher discount rate for merchants. This means that the more a merchant pays, the less a consumer pays, as the merchant is taking on the credit risk and funding costs. Affirm's merchant discount rates range from 8% to 15% for zero-percent longer-term financing, and 4% to 8% for zero-percent short-term financing, as reported by the company. A regular credit card merchant fee is usually around 2% or 3%.

Reducing the cost of a product or paying more for a purchase both reduce the merchant's profit. The latter option is preferable since it does not draw attention to the fact. Selling goods is a way for merchants to acquire money, which is especially important in times of increased corporate borrowing costs. If these costs become too high, it may be beneficial to subsidize even riskier customers since they can still bring in sales.

Investors appear to be taking a cautious approach at the moment, with Affirm's stock dropping by more than 30% in December. There are a number of factors to consider, such as credit risk, funding costs, and competition among providers that could limit the ability to charge merchants higher rates. However, it would be a mistake to assume that buy now, pay later services are going to disappear due to the current uncertainty.