Buy Now, Pay Later: Transforming Retail Economics and Consumer Access

This study explores how Buy Now, Pay Later (BNPL) systems enable merchants to boost sales by offering subsidized loans that attract low-creditworthiness customers, creating a "Robin Hood" effect by lowering prices for low-income consumers. The findings highlight BNPL’s dual role in enhancing merchant profitability and promoting financial inclusivity.

Research by Tobias Berg of Goethe University Frankfurt, Valentin Burg from Humboldt University Berlin, Jan Keil at the Indian School of Business, and Manju Puri of Duke University, examines the economic impacts of Buy Now, Pay Later (BNPL) systems from a merchant's perspective. Published by the National Bureau of Economic Research, the study highlights how BNPL integrates product sales with subsidized loans, offering lower effective prices for low-creditworthiness customers. This dual function enables merchants to price-discriminate based on willingness-to-pay while driving sales and profitability.

Driving Sales Through Price Discrimination

The study's empirical data, drawn from a German e-commerce firm, demonstrates that BNPL increases sales by approximately 20%. This growth is primarily driven by low-creditworthiness customers who respond more positively to the availability of BNPL. The financing option allows such customers, who might otherwise be excluded from traditional credit systems, to access goods with deferred payments. Products with higher profit margins and those sold in markets where merchants have strong pricing power see the greatest benefits. Using a randomized control trial, the researchers show that BNPL functions as more than a payment method—it is a strategic tool that expands consumer access while extracting a higher surplus from the market.

The short-term financing model studied mirrors popular "pay in 30 days" schemes. By allowing customers to delay payments interest-free, BNPL stands in stark contrast to traditional credit cards, which often involve significant interest charges. This fundamental difference makes BNPL particularly attractive to low-income and low-creditworthiness customers, whose purchases drive the majority of the observed sales growth. The researchers argue that this pricing mechanism transforms BNPL into a critical sales driver for merchants.

The "Robin Hood" Effect: Supporting Low-Income Consumers

One of the most intriguing findings of the research is what the authors term the "Robin Hood" effect. Unlike credit card systems, which often disproportionately burden low-creditworthiness users with high fees and interest rates, BNPL effectively offers greater benefits to low-income customers. These customers value zero-interest loans more than high-income buyers, resulting in a lower effective price for the same product. The study notes that this reversal of the typical "Reverse Robin Hood" dynamic observed with credit cards is a major factor behind BNPL’s rapid adoption.

The profitability of BNPL for merchants follows an inverse U-shape, being most beneficial for middle-spectrum creditworthiness customers. For those at the lowest end of creditworthiness, the higher default risks can erode profitability. Conversely, for high-creditworthiness customers, BNPL has minimal impact on purchasing behavior but remains inexpensive to offer. This balance highlights the strategic importance of careful targeting and approval processes for BNPL systems.

The Role of Technology and Market Power

Technology plays a pivotal role in the success of BNPL, particularly in e-commerce settings. Automated credit assessments, often based on digital footprints, lower operational costs and enable merchants to make data-driven decisions. The study shows that merchants approve BNPL applications more frequently for high-margin products and customers with higher creditworthiness, ensuring profitability while mitigating default risks.

Interestingly, the research reveals a significant divide between the use of BNPL in online versus in-store retail. While BNPL is widely offered in e-commerce due to its technological efficiencies, it is less common in physical stores because of higher operational costs and logistical challenges. This suggests that the digital environment is critical to scaling BNPL systems effectively and economically.

Broader Implications and External Validity

The researchers argue that the findings extend beyond the studied e-commerce firm, with similar dynamics observed in external BNPL providers like Klarna and Affirm. Both companies rely heavily on merchant subsidies to offer zero-interest loans, framing BNPL as a powerful sales promotion tool. Klarna’s 2023 annual report, for instance, shows that nearly 80% of its primary revenue comes from merchant commissions, highlighting the broader applicability of the study's conclusions.

These insights help explain the global surge in BNPL adoption, especially in regions where traditional credit systems are either inaccessible or less appealing. The study also addresses regulatory concerns, noting that while BNPL’s unregulated nature has attracted scrutiny over risks like overborrowing and defaults, its alignment of merchant and consumer interests serves as a mitigating factor.

Transforming Retail Finance Strategies

The paper contributes significantly to understanding how BNPL reshapes retail financing strategies. By enabling merchants to align pricing with consumers’ credit profiles, BNPL drives sales and addresses broader market challenges such as inclusivity and accessibility. The findings highlight BNPL’s transformative potential, positioning it as a pivotal innovation in modern commerce. It provides merchants with a strategic advantage, allowing them to tailor offers, expand their market reach, and improve profitability while supporting low-income consumers through equitable pricing mechanisms.

Ultimately, this study underscores BNPL's dual value as a tool for merchants to enhance profitability and as a financial product that empowers underserved consumer segments. By bridging the gap between affordability and accessibility, BNPL redefines the dynamics of payment systems and consumer engagement, solidifying its role as a cornerstone of future retail strategies.