Challenges are mounting for the buy now/pay later industry, with certain large
The dollar value of rewards for lower-ticket BNPL purchases is small compared with credit card loyalty programs giving users 2% to 5% cash back for purchases in specific categories, observers say. But even a minor reward could appeal to consumers who typically do not have access to such perks.
"Rewards could play an important role in marketing BNPL services to underbanked people who aren't accustomed to earning any rewards," said Rutger van Faassen, an analyst with the market research firm Curinos.
A couple of BNPL providers are rewarding customers for making on-time payments, which has the added benefit of offsetting losses and defaults.
Customers who sign up for the BNPL fintech Afterpay’s Pulse rewards program earn 10 points for every on-time payment on its installment loans. Points are redeemable for discounts at participating retailers and can also be used to make BNPL purchases with no upfront payment or to postpone the due date for installment loan payments by up to one week.
Zilch, a U.K.-based BNPL provider that launched services in the U.S. two months ago, is counting on rewards to help drive consumer adoption.
Customers apply for a Zilch BNPL loan online by providing a few pieces of information and receive a Mastercard virtual debit card that enables them to spread payments out over six weeks with no interest. Zilch customers may also opt to get 2% cash back on the purchase if they pay the amount in full.
By giving users 2% cash back for an ordinary debit card payment, Zilch aims to become the default payment option for users who may opt to finance some purchases and not others, said Philip Belamant, Zilch’s CEO.
“It creates a flywheel effect where we’re now seeing some customers using Zilch more frequently as time goes on,” Belamant said.
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Affirm launched a rewards program late last year that also rewards customers with cash-back rewards on certain items paid in full at the time of the purchase, with rewards determined by each merchant.
While merchants say credit card rewards — funded by interchange rates the card networks set — are a burden, they see rewards associated with virtual debit cards, with or without installment-loan financing, as a plus, said Ben Mackinnon, founder and CEO of Kard, a New York startup marketing a white-label rewards platform to fintechs.
"It costs less for merchants to support [lower-rate] debit card rewards versus credit cards, and BNPL rewards programs can be structured to drive business back to merchants," Mackinnon said.
Klarna recently beefed up its loyalty options for shoppers using its BNPL loans. A new feature enables Klarna users to store and access all of their physical loyalty cards as digital versions within the Klarna app, eliminating the need to keep track of individual store loyalty cards for more than 8,000 merchants.
The capability leverages technology from the Germany-based startup Stocard, which Klarna purchased last year, introducing an advantage that could be difficult for other BNPL lenders to duplicate in the near term, van Faassen said.
“By helping consumers consolidate all their loyalty programs within its app, Klarna is providing a convenience that could keep them coming back to that app just because it’s easier,” he said.
Klarna also offers consumers rewards for individual purchases. New users earn a $5 gift card with their first purchase, redeemable at major merchants including Amazon, Walmart, Starbucks, Macy’s and Best Buy, among others. For every dollar spent, customers earn one point that’s credited to their account when they make a payment on an installment plan. Rewards vary based on deals offered by Klarna’s thousands of participating merchants.
In the U.S., Klarna has more than 4 million members enrolled in its rewards program, which the company plans to expand across all global markets this year, according to a spokesperson.
Some credit card users are also earning rewards from making purchases with certain BNPL loans during promotions.
PayPal’s “Pay in 4” BNPL have a seasonal promotion with Discover Financial Services, in which users of Discover’s Cash Back credit card may earn 5% back for all PayPal purchases — including BNPL loans — through September.
Rewards can drive adoption and ongoing usage, but dangling rewards with installment loans could also add to the risk cash-strapped consumers face when juggling several different interest-free installment loans, according to Lauren Sanders, associate director of the National Consumer Law Center.
“A 5% rewards offer may be tempting, but rewards should not obscure the importance of not letting pay-in-four offers make purchases look more affordable than they really are,” Sanders said.
