The hidden costs of buy now, pay later

David Purnell
24 April, 23

As the cost of living becomes increasingly concerning for more consumers, retailers are starting to turn to buy now, pay later (BNPL) options to promote consumer loyalty. If it’s online or in person, shoppers are now being offered the chance to pay in interest-free instalments. Throughout 2022 services like ClearPay, Klarna, and PayPal Pay Later became popular, with Klarna being used by 20,000 merchants in the UK, including ASOS and H&M.

What is BNPL you ask? Put simply, BNPL services typically offer no-interest, short-term loans and often charge no fees, even when it comes to late payments. Part of the growth of BNPL has been the ease and clarity of these loans, and the fact that online retailers are demonstrating they are mindful of their target consumer’s financial health, with people willing to stretch payments for smaller purchases as well as big ones.

Research shows that as of 2022, around 360 million people globally and more than 17 million consumers in the UK have used some form of BNPL services, with electronics being the most common spend and almost one third of BNPL shoppers buying items such as computers, phones, and TVs. Almost one quarter are purchasing luxury items such as designer clothing, jewellery and handbags, further showing how BNPL schemes are making expensive luxuries seem more affordable. Additionally, high street fashion, beauty and lifestyle retailers are clearly keen to partner with BNPL providers to boost their sales. With many online fashion retailers such as ASOS, Boohoo, and SHEIN accepting BNPL services, this is a popular way to afford clothing, especially for the younger generations.

BNPL options vary between providers, but the retailer always receives the full amount from them at the time of purchase. Even though the customers’ payment agreement is with the lender rather than the online retailer, customers must notify both at the time of their return and/or refund request. This must be done to avoid any additional transaction fee or interest, presenting a far more complicated process than they might have experienced when purchasing a product loan-free. Although the options offered by BNPLs can seem too good to be true, many customers have experienced trouble when it comes to returns and refunds due to the complicated structure of the associated policies, maximising the risk of damaging or influencing consumer loyalty.

It’s estimated that BNPL debt accounts for up to 30 percent of online sales. Retailers are paid upfront, while the BNPL provider carries the credit risk for a small fee and a slice of the transaction. This method provides retailers with all the rewards and none of the risks, in theory. Yet when it comes to returns, the process is often tricky, resulting in both retailer and customer scratching their heads. According to PFS research, two-thirds (67%) of shoppers admit that they are put off a retailer entirely if the returns process is difficult. Retailers could reject the idea of a BNPL, but as this additional service becomes more popular, it is no longer enough to only offer card as a payment option online.

What risk does this bring to a business?

With the ongoing cost of living crisis, online retailers are already struggling financially. It should be noted that the BNPL consumer repayment method is not currently financially regulated, meaning customers have little protection in the event of any financial dispute.

At this point in time, merchants have a relatively safe opportunity to increase sales and gain new, younger customers with the BNPL services. Online retailers and brands should be aware that as this method of payment grows, so will the threats for fraud connected to it.

Make sure your customer service is top-notch

People have gotten accustomed to refunds and returns being simple. With BNPL loans being a relatively new option, return policies.  Online retailers may also have their own rules for BNPL returns and whether goods bought online can be returned in-store. For example, shoppers must first request a refund from the seller and continue to make payments until the return is approved, with the funds then reimbursed within a set period. The hassle of a return policy has the tendency to negatively impact customer loyalty towards a retailer they might have a longstanding relationship with.

Ensure your inventory and stock management is prepared

Although BNPL processes might be time-consuming on a financial/admin level, this doesn’t need to be true in the warehouse. Retailers must start to see opportunities to reduce unnecessary touchpoints within their processes, such as waste and overheads while recovering lost profits. When considering reverse logistics, there should also be a need to reconsider how to manage in-store and curbside returns for BNPL customers. Today’s consumers love to shopping online, but they don’t always love the return experience. Shoppers have come to count on, not only free shipping, but also free returns. While some retailers are rethinking their eCommerce returns, there is a bigger picture that should be considered. Because of the structure of BNPL purchases, the process won’t work in the usual way as the retailer doesn’t manage the payment or the refund directly. To keep customers happy, retailers could consider creating an alternative process that allows in-store drop-offs while educating consumers about how to request refunds through the third-partys. Developing the correct eCommerce returns strategy can improve product turnover as well as create transparency for customers, with the hope of retaining their loyalty.

Research shows the benefits retailers can gain by offering pay-over-time, such as higher average order values (AOV) and conversion rates, along with lower cart abandonment and customer acquisition costs. Along with the increased likelihood of repeat purchases and customer satisfaction can add more loyalty.

As with any new avenue utilised to improve customer loyalty, questions will always follow. Such is the case with BNPL yet the growing popularity and use of the system by many popular retailers, suggest that BNPL methods aren’t going away anytime soon.

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