Buy Now Pay Later: Smart consumption or simply avoidance of pain of paying

Principal Investigator:
Min Chung Han

Abstract:
Buy-now, pay-later programs allow consumers to pay for purchases in four installments, without charging any fees. The service providers argue that BNPL promotes inclusion by serving financially underserved consumers.
Yet there is rising concern that the BNPL lacks consumer protection, leading them to bad credit. About 26% of BNPL users have missed a payment at least once. Retailers pay high processing fees of BNPL to attract more consumers, however, consumers who fail to payback may face financial hardship and not come back for shopping to the retailer. To protect consumers and provide appropriate service, it is important to understand how consumers perceive BNPL, and what makes consumers to choose BNPL over other payment options.

Description of Research:
The rapid expansion of the buy-now, pay-later (BNPL) installment payment system has infiltrated virtually every facet of e-commerce in the United States. According to a 2022 report by the National Retail Federation, nearly half of all merchants offered at least one BNPL service. Due to the popularity, the cumulative value of BNPL payments grew from $2 billion to $24.2 billion between 2019 and 2021.
Buy-now, pay-later programs, such as Affirm, allow consumers to pay for purchases in four installments in two-week cycles, without charging any interest or fees. The service providers argue that BNPL promotes inclusion by serving financially underserved consumers who lack access to traditional credit or banking services.
Yet there is rising concern that the BNPL lacks consumer protection, leading them to bad credit and delinquency. About 14% of BNPL users have missed a payment once, and 12% have missed more than once. For young consumers with no credit or a short credit history, this mishap could hinder their access to credit or even employment in the future. Retailers pay high processing fees of BNPL to attract more consumers, however, consumers who fail to payback may face financial hardship and not come back for shopping to the retailer. To protect consumers and provide appropriate service, it is important to understand how consumers perceive BNPL, and what makes consumers to choose BNPL over other payment options.
This raises intriguing research questions: what factors entice online consumers to use BNPL services rather than other payment methods? Does financial trade-off of using BNPL service (e.g., coupon not applicable) deter consumers’ BNPL adoption decision?
Despite the rapid growth of the BNPL market, it is quite surprising that academic research from marketing perspective has been extremely limited. This study attempts to explicate the effect of BNPL services on consumers’ purchase decision, based on mental accounting and the framing effect, by examining key decision factors. This study has a three-fold purpose: (a) to understand how BNPL information framing (segregated format vs. integrated format) is interpreted differently based on consumers’ mental accounting, (b) to investigate consumers’ willingness to choose BNPL service when there is financial trade-off such as discount coupon can’t be applied when using BNPL service and (c) to suggest managerial implications to ensure the success of BNPL service and to support consumers’ well-informed buying decisions.
This research will consist of two online experimental studies. The first study will examine how the framing of BNPL installment and penalty information influences consumers’ intention to adopt BNPL. The second study will investigate whether the financial trade-off impacts consumers’ adoption of BNPL and their attitude towards the retailer. Also this study explores whether online consumers’ preference for BNPL over other payment methods is correlated with their financial literacy level.
This research will contribute to the literature on consumers’ online buying behaviors regarding payment systems and expand the field’s understanding of the factors that impact consumers’ adoption of BNPL. It also provides potential consumer-oriented policies that online retailers can incorporate to support consumers in making well-informed buying decisions. Ultimately, this study contribute to and support the online retailers partnered with BNPL payment industry and online consumers.