Re-engineering buy now, pay later: the rise of responsible consumerism
Promotional research for Natwest Boxed by Ben Silitoe｜December 5, 2024
Retailers are open to providing new-style financial services to shoppers, but the industry knows it must focus on “responsible consumerism” as relationships with shoppers evolve.
Fuelled by evolving consumer preferences and emerging technologies, retailers are increasingly exploring new ways to help shoppers spend responsibly amidst a continually challenging economic climate.
Some of the UK’s largest retailers are considering embedding financial services into their customer journeys, commonly known as “embedded finance”, such as savings accounts, digital wallets and credit options including buy now pay later (BNPL), which has become commonplace in recent years.
“Some consumers are using BNPL and sending back 100% [which brings with it several costs to the business].”
Despite economic improvements, the expected forthcoming tightening of BNPL regulations and other cost pressures – such as tax hikes in the wake of October’s Budget and rising material costs – are playing out against a backdrop of continued consumer caution and fiscal pressure on households up and down the country.
This combination of factors is influencing retailers to think more creatively about how they engage with consumers, drive loyalty and add new revenue streams that can help boost their bottom line in challenging times.
One technology leader at an online fashion pureplay tells Retail Week the business is looking at ways of personalising credit and payment options for its shoppers in an effort to reduce returns. For example, serial returners might be shown higher price points or have restrictions on what payment methods they can use.
“BNPL has been good for overall growth but bad for driving certain misbehaviour,” he explains.
“Some consumers are using BNPL and sending back 100% [which brings with it several costs to the business]. However, some of our most profitable customers use BNPL because they have huge baskets – we want to flex based on segmentation of customer.”
Natwest Boxed chief executive Andy Ellis notes: “Retailers need to evolve their credit options, such as Buy Now Pay Later”
Natwest Boxed chief executive Andy Ellis notes: “Retailers need to evolve their credit options, such as Buy Now Pay Later”
A finance leader at an electricals retailer tells Retail Week offering customers savings accounts so they can build up to a purchase could be a responsible and positive way of supporting shoppers in addition to the credit option.
He suggests credit is around one-fifth of the retailer’s overall business at present, but notes the organisation is asking itself ‘how far can it go?’ in this space.
“Do we need to complement it with savings, or a third party such as Klarna, or something else?” He asks, highlighting how important it is for retailers to consider and optimise additional revenue streams in the current economic landscape.
A report by NatWest Boxed and Boston Consulting Group, published in March, found embedded finance could unlock an incremental revenue of between 4%-7%.
According to the study, when financial products and services are directly integrated into the customer journey, retailers report a 5%-12% boost in conversion rates and a 15%-30% increase in average order values too.
Embedded finance has evolved from being a nascent concept to a proven strategy that is transforming how financial services are delivered and consumed as part of our everyday lives. What does it all really mean? In simple terms, embedded finance allows brands to embed financial services quickly and cost effectively into their customer experience.
The potential revenue boost and customer engagement potential of these new financial products are catching the eye of retailers across different sectors.
Retailer responsibility
As retailers explore their options, they will need to become more aware of the risk and regulation landscape that comes with them. They have a responsibility to protect consumers, be transparent with credit offerings and conduct relevant checks to ensure shopper affordability.
This has been further brought to light by the last month's developments in the BNPL market, according to NatWest Boxed chief executive Andy Ellis.
Regarding BNPL, the UK government has launched a consultation on proposals to add key consumer protection when using these services. Until now, protections have not existed in the same way as they have for traditional credit provision.
Probable subsequent legislation will result in BNPL companies coming under the supervision of the Financial Conduct Authority (FCA) and applying the Consumer Credit Act, which will give users access to clearer information, protect them from unaffordable borrowing and give them strong rights when issues arise.
One fashion retailer told us he welcomed the move but added that he expected it will result in some BNPL providers leaving the UK.
Valued at $349.4bn (£274.12bn) in gross merchandise value last year according to GlobalData, BNPL – which enables consumers to split the cost of their transaction over a period of time – accounts for a significant number of retail sales, and the tightening of the market is noteworthy for those who have come to rely on it.
“Retailers need to evolve their credit options, such as Buy Now Pay Later,” Ellis notes, adding that regulated embedded finance operated under the name of an individual retailer, where there tends to be brand trust built over time, is a viable alternative option. By working with an established licensed bank, retailers have the advantage of leaning on the bank’s mature and extensive compliance capabilities.
“Retailers play such a prominent role in people’s lives and should take on more responsibility aside from simply facilitating a transaction and exchange of goods for financial gain.”
A director of a large grocery and general merchandise retail group says retailers need to start thinking about adopting a position of “responsible consumerism” in general – not just around embedded finance.
Retailers play such a prominent role in people’s lives and should take on more responsibility aside from simply facilitating a transaction and exchange of goods for financial gain, she argues.
“As an operator of one the most visited websites in the UK, we have a big responsibility.
“We provide services for people. We don’t sell crap, so we offer a reasonable credit proposition to allow the customer to make an informed choice. And looking at the ESG agenda too, we need to consider all of these things – and we can all do a better job in serving that to consumers.”
Consumer spending
So, what does that modern consumer look like?
As Retail Week research – conducted in association with Retail Economics and published in July – predicted, inflation has continued to drop throughout the year, prompting confidence for peak period sales growth in 2024.
Retail Economics chief executive Richard Lim says: “The good news is we are through the worst of the cost of living crisis.
“We had 18 consecutive months when inflation was outpacing earnings growth, which had a squeeze on consumers’ spending power. It actually eroded around £50bn of spending power in the UK.”
But despite inflation dropping, the cost of goods remains higher than it was three years ago. Lim estimates an average basket of goods and services that cost £111 in 2021 would now cost £134.
Retail Economics indicates consumers will feel the burden of businesses being asked to increase National Insurance contributions in the recent Budget. This will manifest itself in the form of reduced benefits and a freeze on pay rises, and according to Lim it will likely result in businesses “not looking to recruit as aggressively” as they otherwise might have done.
And although Office for Budget Responsibility data shows savings rates are up, Lim says this is predominately across the most affluent households. In general, those with the lowest income and the stretched middle class – especially what Lim calls “aspirational millennials” who have only ever known cheap interest rates and currently have multiple borrowings – will continue to feel the squeeze.
Retailers spoke to Retail Week candidly about the impact of such an economic environment, with Darsh Chand, director of stores at Holland & Barrett saying the business has doubled down on own-brand product innovation in an effort to “improve our offer to our customers with highly efficacious, great value and great tasting products”.
Retail Economics’ chief executive estimates a basket of goods and services that cost £111 in 2021 would now cost £134
Retail Economics’ chief executive estimates a basket of goods and services that cost £111 in 2021 would now cost £134
“Investing ahead of the curve is necessary whilst income is squeezed and the economy is challenged,” he says. “Investing today for sales and revenue growth tomorrow is a challenge for sure but we are committed to driving great value and experiences for our customers and colleagues.”
A senior digital leader at a home improvement chain adds that the business has taken tens of millions of pounds out of its supply chain costs by developing AI tools for forecasting and planning, in order to keep a strong balance sheet.
A finance leader at a premium department store acknowledges that although the retailer hasn’t lost customers, basket sizes have dropped and they are shopping less frequently than before the cost of living crisis.
Meanwhile, the regional head of a food and fashion retailer says challenging economic times have forced the business to look holistically at the balance sheet.
“We look at the big items on P&L that cost us a lot of money – things such as stock not moving,” he explains.
“When times are good you don’t look at it so much, but we now have teams focused on that and tech to reduce shoplifting and waste. We’re looking at what we can control to improve gross margin.”
Crossroads
With so much on their plates, it’s little wonder retailers are looking at new ways to engage with consumers and drive fresh revenue streams.
“Obviously lots of customers need and want to have flexible finance options,” Ellis notes.
“But putting it in your own brand helps conversion and drives repeat purchases. Retailers can use their brand to diversify into financial products.”
He adds: “A strong, large brand might say we want to deepen relationships and cross-sell with customers and offer savings, lending or foreign exchange – it reinforces the community and reinforces relationships with the customer.”
“If you want to outperform and differentiate you need to invest in innovation.”
Over the last two years, Frasers Group has been developing its own BNPL capabilities as it builds out its financial services. How this is deployed and received by consumers might prompt other retailers to explore embedded finance options of their own, says Ellis.
“We’re alive to the need for easy integration [with embedded finance],” he continues, adding that retailers could grow revenue and foster loyalty by building financial services seamlessly into their consumers’ shopping journeys.
NatWest Boxed chief commercial officer George Toumbev says today’s retail landscape could be fertile ground for new ideas such as ‘save now, buy later’ products gaining traction.
In a call to action for retailers to think differently than before, he adds: “Of course, the core business has to be healthy and that’s the engine but if you want to outperform and differentiate you need to invest in innovation. There are plenty of new opportunities to capture greater market share.”
The retailers and spokespeople quoted in this article were talking at a breakfast roundtable event hosted by Retail Week and NatWest Boxed on November 6, 2024.
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