Marketing Pulse Blog


Fractional Payments: How Flexible Buying Options Affect Consumer Spending

Written by
Zlata Faerman

Fractional payments are a convenient way for consumers to pay for products incrementally. Payment platforms like Klarna, Affirm, Afterpay and others offer shoppers a buy-now-pay-later model through which they can complete purchases with pre-scheduled incremental payments, instead of paying in full at the time of purchase. 

As fractional payments become more popular with consumers, many brands are incorporating its flexibility into their buying experiences in an effort to capture sales they might not have otherwise. 

Why Are Consumers Using Fractional Payments?

Convenience: It’s no secret the pandemic pushed more consumers to make more of their purchases online. In fact, according to one survey by C+R Research, 67% of respondents said they did “more than half” of their shopping online during the last year. In the same survey, 60% of respondents said they’d used a buy-now-pay-later service, and 51% said they did so during the pandemic. With this surge of online shopping, which has long enjoyed a rising popularity anyway, more merchants also began integrating fractional buy-now-pay-later options into their online buying experiences. Together, these factors have created a significant boost in adoption of the buy-now-pay-later feature in online shopping. 

In fact, this August, Klarna announced its user numbers have soared since last summer, with the company doubling its US customer base since June 2020, reaching a record 20 million customers. Services like Klarna offer the end-user the convenience of purchasing an item now and paying for it over time. 

With the Klarna app, and others like it, consumers can choose to pay in a way that suits their needs — splitting the cost of an item in 4 equal payments, arranging payment in 30 days, or in some cases, even acquiring FDIC-backed financing for up to 36 months. 

Budget flexibility: Another recent study on flexible payments conducted by Ascent aligns with findings from C+R Research, showing similar trends across the board. Both surveys indicate that most people are making fractional payment purchases with services like Klarna and Afterpay to gain more flexibility and cash flow for more expensive purchases — in Ascent’s survey, some 45% of respondents said they used the service to make purchases that would not otherwise fit into their budgets. Notably, another 37% said they used the service to avoid paying credit card interest.

According to both surveys, electronics are the most popular items purchased with fractional payment services, followed by clothing and fashion, and then furniture and housewares. With this data, we can infer that most consumers using these services are leveraging the advertised no-interest options to make bigger purchases than they would have otherwise been able to afford, allowing retailers to capture sales they otherwise might not have. 

While critics say these services may encourage people to live beyond their means, champions point to the fact that they offer a responsible alternative to credit card debt, since there is often 0% interest, longer financing terms, and no credit check. 

How Brands Can Leverage Flexible Payments 

While online shopping has never been more popular, brick-and-mortar retail certainly isn’t dead. Klarna’s in-store flexible payment solution, for example, has already rolled out at Sephora, GameStop, Footlocker and others, and the results are impressive: Retailers offering Klarna in-store saw a 20% increase in conversion and a 65% AOV increase. 

Another point of interest: According to the Ascent survey, 61% of users said they would rather use a buy-now-pay-later service offered directly from the retailer as opposed to going through a third-party, which is likely one driving force behind some of the big brands getting on board. Another factor is that the retailers are hoping the buy-now-pay-later trend will bring in younger sets of shoppers who tend to expect more flexibility than traditional department store credit cards can offer. 

But what about the risks? What if shoppers don’t pay? For most retailers, the risks will come down to a simple cost-benefit analysis. When shoppers buy their product, the retailer is generally paid up front for the entire purchase price by the service (i.e., Klarna), minus a small transaction fee that goes back to the service. Aside from returns, which are also deducted from merchant payments, this fee is the only cost associated with the service. The service itself takes care of collecting the payments from consumers, adding late fees, restricting future use, and reporting to credit bureaus if a transaction results in non-payment. This allows retailers to advertise the appeal of flexible payments without having to manage the minutiae of payment management. 

Here are a few other ways these services are helping to boost retail engagement and conversion. 

  • New business from new channels. One big draw buy-now-pay-later services offer brands is more shoppers from more places. For example, Klarna continually drives shoppers to partner sites through their app, website and other channels. This kind of partnership — similar to affiliate and influencer marketing — provides a revenue stream retailers can activate with less management, which reduces overhead costs and marketing efforts while still improving revenue. In the case of Klarna, this is the equivalent of reaching an additional 20 million high-intent US-based shoppers.
  • Higher average orders. Because customers can distribute the cost of goods over time, they’re willing to commit to a bigger purchase. In an often-cited psychology experiment from the 1990s, researchers set up an auction for sold-out Celtics tickets. Half of the participants were told they could pay with credit; the other half were told they could only pay with cash. The credit group bid more than twice as much on average. According to Klarna, their customers have seen up to a 70% increase in revenue and 30% increase in conversion. Affirm promotes similar results on their website, claiming their customers have seen up to 85% higher average order values.
  • More opportunities to see upgrades, add-ons and loyalty. With the “psychology of credit” supporting the conversion, there are more opportunities to successfully upsell clients with key product upgrades and accessories with bundles along the way, encouraging deeper engagement and bigger orders while creating a better user experience.  

While tangible goods and electronics are the front-runners now, we may see a shift in the future, particularly as world economies recover from the pandemic. Big-ticket items like flights, cruises, amusement parks, and other leisure travel purchases may soon see their own uptick, as consumers once again look to travel, seeking new experiences and demanding the flexibility to pay as they wish. 

Getting Started With Flexible Payments 

Flexible payments offer brands a way to expand their user base, capture bigger sales, and improve the customer experience with attractive payment options. 

To talk more about integrating flexible payments into your user experience, or to just talk more about performance branding, get in touch any time.

Featured image by Sam Lion on Pexels.

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Written by
Zlata Faerman

Zlata is a full-time publicist, part-time writer, and round-the-clock ambassador to wit and humor. As a publicist for over 15 years, she helps launch products with creative ideas and garner press coverage that drives reputation and sales. She also contributes to a variety of lifestyle publications in the areas of food, parenting, health, beauty, marketing, travel, and home. When she’s not crafting kitchen concoctions for her food blog @lifeandthymez, Zlata can be found spending time with her family, having #zlatathoughts, and fantasizing about being a Real Housewife of New Jersey.


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