Helping Customers Pay Their BNPL Accounts on Time

VISUAL ANALYSIS SUMMARY Helping customers pay their BNPL account on time In short The AFM and 'Buy Now, Pay Later' (BNPL) provider Riverty investigated the effect of an SMS payment reminder on the behavior of more than 34,000 customers. The relatively simple intervention proved effective: the share of customers who paid late and were charged fees decreased by one in five. The AFM encourages BNPL providers to ensure that more customers pay on time and that fewer customers have to deal with fees. This involves, among other things, understanding the barriers consumers experience, designing interventions that can help them pay on time, measuring the effect of these interventions, and sharing this knowledge.

VISUAL ANALYSIS SUMMARY A customer makes an online purchase and chooses to pay later. The payment processing is taken over by the BNPL provider. Paying later is usually free, provided the customer pays on time. 1x mt 40 1 Buy now, pay later? €89.75 Before costs are charged, Riverty sends reminders via e-mail and via push notification in the app. Pay within 14 days. 19 days late? Then costs are charged. = costs 1 2 3 Invoice Heads-up Due date First reminder with costs Reminder Day 0 11 14 16 33 75 @ @ @ @ Transfer to collection agency Sending the SMS reminder meant that the number of customers for whom costs were charged decreased by at least one in five. 5 @ sms E-mail Push notification in app Letter by post Sms 4 Intervention on day 13: An extra SMS reminder was sent to the customers in the three experimental groups. sms @

ANALYSIS REPORT Table of Contents

1. Summary 3
2. Introduction to BNPL 4 2.1 Paying later with Riverty 4 2.2 Helping customers pay their BNPL account on time 6
3. SMS reminders 7 3.1 Clearly stating the due date 7 3.2 Clearly stating the due date and consequences 7 3.3 Clearly stating the due date and making payment easy 8
4. Experiment 9 4.1 Procedure 9 4.2 Sample 10 4.3 Analyses 11
5. Results 12 5.1 SMS reminders lead to significantly more payments before costs 12 5.2 SMS reminders lead to more payments before or on the due date 13 5.3 Starting points for further research based on customer characteristics 15
6. Conclusion 16

Helping customers pay their BNPL account on time 3 ANALYSIS REPORT

1. Summary The number of Buy Now, Pay Later (BNPL) transactions has increased in recent years. BNPL is normally free, provided the customer pays the outstanding amount within the specified term. If this is not done, most BNPL providers charge fees for this. The AFM and BNPL provider Riverty jointly conducted an experiment with the aim of helping customers pay on time. This experiment showed that a relatively simple intervention – sending an SMS reminder – reduces the share of customers who pay late and are consequently charged fees by at least one in five. The SMS reminder helped customers overcome practical barriers, such as not being aware or forgetting the final payment date, not receiving e-mails or push notifications, or not reading or understanding the information about the costs for late payment. Although the SMS reminder had an effect, one in eight customers still had to deal with late payment fees. The AFM encourages BNPL providers to ensure that more customers pay on time and that fewer customers have to deal with fees. This starts with providing BNPL responsibly. Furthermore, it is important to understand what barriers consumers experience, to design interventions that can help them pay on time, to measure the effect of these interventions, and to share this knowledge.

Helping customers pay their BNPL account on time 4 ANALYSIS REPORT 2. Introduction to BNPL 1 AFM, 2024 2 AFM, 2022 3 AFM, 2024 4 Prelec & Loewenstein, 1998; Thaler, 1999 5 Frederick, et al., 2002; O’Donoghue & Rabin, 2015; Ericson & Laibson, 2019; Laibson et al., 2007; Skiba & Tobacman, 2008; Meier & Sprenger, 2010; Ottaviani & Vandone, 2011 6 Some providers use a flat fee structure, while others use a dynamic structure where the amount of the fee depends on the order amount. For several years, Dutch consumers have been able to make online purchases using Buy Now, Pay Later (BNPL). With this service, consumers can postpone the payment of a purchase until 14 or 30 days after the order has been shipped, or pay in three installments. The use of BNPL has increased enormously in recent years.1 In 2022, BNPL providers in the Netherlands processed some 45 million transactions with a total value of €4.8 billion. In that year, the number of transactions grew by 8% compared to 2021, and the total value of transactions increased by 13%.2 Consumers give various reasons for using BNPL.3 For example, because they want to see or try a product first before paying or returning the product. Additionally, consumers may have financial reasons for using BNPL. For example, because they prefer to spread payments or like to pay flexibly (such as only at the moment they have received their salary from the next month). The use of deferred payment services like BNPL can be explained from a psychological perspective. Research shows that the method and timing of payment can influence people's considerations to buy something.4 Additionally, people tend to focus more on the present than on the future.5 When consumers use BNPL, they may register the pleasure of the purchase, but pay less attention to the negative feelings surrounding the payment, which occur later. BNPL makes the ordering process easy for consumers because it is a relatively 'frictionless' payment method. BNPL requires few actions from the consumer to complete a purchase, just like paying with a credit card whose details are saved online. Because BNPL makes it easy to place orders and pay later, it can happen that consumers buy more products and incur more payment obligations than they would have without BNPL. BNPL is normally free, provided the customer pays the outstanding amount within the specified term. If this is not done, most providers charge fees for this. These late payment costs average around €15 and are €40 or higher for claims transferred to a collection agency.6 Since the number of BNPL transactions continues to increase, it is important to help customers pay on time and ensure they are not confronted with these costs. 2.1 Paying later with Riverty The AFM, in collaboration with BNPL provider Riverty, conducted an experiment testing the effectiveness of SMS reminders. Customers were reminded via an SMS message that they had to pay, with the aim of helping them avoid costs for late payment. Riverty is one of the largest BNPL providers in the Netherlands. The company offers consumers the option to postpone the payment of a purchase until 14 days after the order has been shipped. When completing the order on the website of the

Helping customers pay their BNPL account on time 5 ANALYSIS REPORT retailer, consumers can select Riverty as a payment method. Before completing the payment process, consumers can click a link that takes them to a web page with Riverty's general terms and conditions. This page explains that paying late involves costs, with a link to a table showing the fee structure.7 Once Riverty is selected as the payment method, Riverty performs several checks before the order is accepted. For example, Riverty performs checks on age and identity, and collects publicly available information about the consumer's personal and financial situation. For returning customers, Riverty also checks past payment behavior. If the consumer is approved to use Riverty, the order is placed and the customer receives an order confirmation from the retailer. From this moment, Riverty is responsible for processing the payment and bears the fraud and credit risk. 7 Riverty General Terms and Conditions. 8 The different events in the communication process (such as the due date, the first reminder with costs, and the second reminder with costs) do not occur for all customers on exactly the same day after the invoice is sent. For some customers, payment is temporarily paused, for example because they have reported a partial return to Riverty, or because they have requested a payment pause themselves. The timeline we describe here is a representation of the regular communication process. 9 Riverty charges dynamic costs based on the order amount for these reminders. See Riverty - table with fee structure. Riverty's communication with the customer begins after the retailer has shipped the order. Riverty creates an invoice and sends it to the customer by e-mail. We call this 'day 0'.8 The due date for payment is 14 days later. In the regular communication process (which applied to all customers in this experiment), Riverty reminds customers of the due date by sending e-mails and push notifications via the Riverty app. To customers who have not fully paid the outstanding amount on day 33 (19 days after the due date), costs are charged. These costs vary from €7 to €19 and depend on the order amount.9 Riverty sends customers another reminder via e-mail on day 40. To customers who have not fully paid the outstanding amount on day 46 (32 days after the due date), costs are charged a second time; these range between €9.50 and €21 and are communicated to the customer by e-mail and letter. After this second reminder with costs, Riverty sends customers an e-mail and an SMS on day 58 and 65. If the outstanding amount is not fully paid by day 75, the claim is transferred to a collection agency. Figure 1. Visual representation of Riverty's communication process Note for Delta3: timeline please across two columns Invoice Heads-up Due date First reminder with costs Reminder Second reminder with costs Second announcement collection agency First announcement collection agency Transfer to Collection agency reminder Day 0 11 14 16 33 40 46 58 65 75 @ @ @ @ @ @ @ @ sms @ sms @ sms E-mail Push notification in app Letter by post Sms Riverty Communication Procedure Invoice Heads-up Due date First reminder with costs Reminder Second reminder with costs Second announcement collection agency First announcement collection agency Transfer to Collection agency reminder Day 0 11 14 16 33 40 46 58 65 75 @ @ @ @ @ @ @ @ sms @ sms @ sms E-mail Push notification in app Letter by post Sms Riverty Communication Procedure Figure 1 Note for Delta3: timeline please across two columns Figure 2 sms Riverty Communication Procedure, including experimental intervention on day 13

Helping customers pay their BNPL account on time 6 ANALYSIS REPORT 2.2 Helping customers pay their BNPL account on time An effective intervention ensures that fewer BNPL customers have to deal with late payment fees. To design such an intervention, it is important to understand why customers pay late and what barriers they encounter in this process. Customers who do not pay on time can roughly be divided into two groups. The first group concerns customers who do not have the financial means to pay on time. BNPL providers perform creditworthiness assessments, but these assessments are not as strict as for loans to which the European Consumer Credit Directive applies. This means that BNPL providers do not have a complete picture of their customers' financial position. This group of customers also includes people who, after making a purchase, face unforeseen events and expenses that prevent them from paying. The second group concerns customers who – although they have the financial means to (on time) pay – experience practical barriers that prevent them from paying. In this experiment, we focus on this group. Customers do not pay on time, for example, because they are not aware of the due date or have forgotten this date. In the procedure Riverty used before the start of the experiment, it reminded customers of the due date by sending e-mails and push notifications via the Riverty app. Some customers may never receive these reminders because they provided an incorrect or one-time e-mail address during the payment process or because they have not installed the Riverty app. Additionally, customers who do receive the reminders may not read them or may not understand the information about the due date and the costs for late payment. Based on these insights, we designed and tested a simple intervention: an SMS reminder to help customers pay on time.

Helping customers pay their BNPL account on time 7 ANALYSIS REPORT 3. SMS reminders 10 Karlan et al., 2016 11 Haynes et al., 2013 12 Dai et al., 2019; Milkman et al., 2021; 2022; Patel et al., 2023 13 Dale & Strauss, 2009; Malhotra et al. 2011 14 Mayer & Fontelo, 2017 15 Fishbane et al., 2020 16 Haynes et al., 2013; Uhl et al., 2019 17 Dušek et al., 2022 Previous research shows that SMS reminders can have a positive effect on people's behavior – both financially and non-financially. Examples include achieving savings goals,10 paying fines,11 getting vaccinations,12 voting in elections,13 following an HIV treatment plan14 and appearing in court.15 Therefore, we expected that SMS reminders would also be effective in helping customers pay their BNPL account on time. The advantage of SMS reminders is that they can be sent to almost all customers, including those who provided an incorrect or one-time e-mail address and those who have not installed the Riverty app. Furthermore, we assumed that customers would notice an SMS message earlier than an e-mail, because most people receive far fewer SMS messages than e-mails and because most people get a notification on their phone for every new SMS message they receive. Because the goal was to help customers solve the problem of delaying and forgetting their payment, we expected that timing would also be a crucial factor for the effectiveness of the intervention. In this experiment, SMS reminders were sent on the day before the due date. We expected this to be the most likely moment for customers to take immediate action and pay the outstanding amount. Finally, previous research shows that personalized SMS messages have a greater effect on the recipient's behavior than non-personalized SMS messages.16 Therefore, we addressed customers in the SMS messages by their first name. We designed three different SMS messages for this experiment: a simple SMS reminder, an SMS reminder containing information about the costs the customer can avoid by paying on time, and an SMS reminder with a payment link. 3.1 Clearly stating the due date The first version of the SMS message (the SMS reminder) simply reminded customers that they had to pay. By keeping the SMS reminder short, the chance is greater that customers who read the SMS message will absorb the most important information. 3.2 Clearly stating the due date and consequences The second version of the SMS message – the SMS reminder incl. consequence – reminded customers not only of the approaching due date, but also contained a sentence intended to make the consequences of late payment clear. It is possible that customers do not take action in time and miss a due date because they are not aware of the negative consequences. By making the consequences of late payment clear, possibly more customers will pay on time. For example, previous research with speeding reminders showed that emphasizing the fine for late payment in a reminder letter increased the percentage of timely payments.17

Helping customers pay their BNPL account on time 8 ANALYSIS REPORT Before customers complete an order with Riverty, they have the opportunity to read in the general terms and conditions that late payment costs are charged. But just like with the due date, it is possible that customers did not read or understand the information, or that they forgot the costs when the due date approached.18 By making the consequences of late payment clearer, these customers can thus be helped to pay on time. 3.3 Clearly stating the due date and making payment easy The third version of the SMS message – the SMS reminder incl. payment link – reminded customers not only of the approaching due date, but was also intended to make payment easier. Apparently small barriers can prevent people from doing what they have intended. Removing these barriers can have a significant effect on their behavior. For example, the tax authority in the United Kingdom conducted an experiment with a simple intervention: the recipients of a certain letter were referred directly to a specific form instead of to a general web page. This small adjustment led to the collection rate of the relevant taxes increasing from 19% to 23%.19 Adding a payment link to the SMS reminder can help customers pay on time, as it saves them the effort of figuring out how they can pay themselves. 18 After this experiment was conducted, four BNPL providers in the Netherlands jointly drew up a BNPL code of conduct. Part of this code of conduct are agreements to better inform customers about the possible costs associated with late payment. 19 BIT EAST Framework Guide, 2014

Helping customers pay their BNPL account on time 9 ANALYSIS REPORT 4. Experiment 4.1 Procedure The aim of the experiment was to test whether sending an SMS reminder on day 13 – one day before the due date – would lead to more customers paying the outstanding amount in full before the first reminder with costs on day 33. Figure 2 shows a timeline of the communication from day 0 to day 75, including the moment of intervention. On day 0, customers were randomly assigned to one of the four experimental groups. In the control group, customers received all communication according to the regular procedure, but did not receive an SMS reminder. In the three groups with SMS reminders, customers received all communication according to the regular procedure AND an SMS reminder on day 13. Figure 3 shows the four experimental groups. Figure 2. Visual representation of Riverty's communication process, including experimental intervention on day 13 Note for Delta3: timeline please across two columns Invoice Heads-up Due date First reminder with costs Reminder Second reminder with costs Second announcement collection agency First announcement collection agency Transfer to Collection agency reminder Day 0 11 14 16 33 40 46 58 65 75 @ @ @ @ @ @ @ @ sms @ sms @ sms E-mail Push notification in app Letter by post Sms Riverty Communication Procedure Invoice Heads-up Due date First reminder with costs Reminder Second reminder with costs Second announcement collection agency First announcement collection agency Transfer to Collection agency reminder Day 0 11 14 16 33 40 46 58 65 75 @ @ @ @ @ @ @ @ sms @ sms @ sms E-mail Push notification in app Letter by post Sms Riverty Communication Procedure Figure 1 Note for Delta3: timeline please across two columns Figure 2 sms Riverty Communication Procedure, including experimental intervention on day 13

Helping customers pay their BNPL account on time 10 ANALYSIS REPORT Figure 3. Visual representation of the four experimental groups. Left the three groups with SMS reminders and right the control group in which no SMS reminder was sent. 1 Riverty Hello [customer name], We would like to remind you that your payment for [product/service @retailer] of [€] on [DD/MM/YYYY] must be paid. 1 Riverty Hello [customer name], We would like to remind you that your payment for [product/service @retailer] of [€] on [DD/MM/YYYY] must be paid. Pay on time to avoid [€] extra costs. 1 Riverty Hello [customer name], We would like to remind you that your payment for [product/service @retailer] of [€] on [DD/MM/YYYY] must be paid. Use the following link to pay securely and quickly with iDEAL [payment link]. 1 Group 1: SMS reminder Group 2: SMS reminder incl. consequence Group 3: SMS reminder incl. payment link Control group: No SMS reminder The three experimental groups Note for Delta3: figure please across two columns // text of the SMS messages must remain readable Figure 3 4.2 Sample The sample consisted of customers of a large online retailer in the fashion industry. We selected this retailer for the experiment because it allowed us to reach a sufficiently large sample within a reasonable timeframe. It is important to mention that customers who use Riverty at the selected retailer differ in various respects from customers who use Riverty at other retailers. In the twelve months preceding the test period, customers of the selected retailer were on average younger, ordered on average for a higher amount, and were less likely to pay the outstanding amount in full before the due date and to pay the outstanding amount in full before costs were charged. Given these differences, caution is advised when generalizing findings from this experiment to other retailers.

Helping customers pay their BNPL account on time 11 ANALYSIS REPORT All 47,709 unique customers who chose Riverty as the payment method for purchases at the selected retailer in the period from June 1, 2023 to and including June 30, 2023...