Are Buy Now, Pay Later Benefits Too Good to Be True?

A growing number of brands are sold via buy now, pay later (BNPL) models. And, thanks to inflation and continually increasing living costs, consumers are motivated to use BNPL options for online and in-person purchases alike. It’s estimated that 60 percent of shoppers have tried BNPL services at least once. By 2027, there are expected to be 900 million BNPL users worldwide, an increase of 157 percent.

BNPL is a form of credit that allows shoppers to split their purchases into smaller, typically interest-free installments, with the first installment paid at checkout. Part of the growth of BNPL has been the ease and clarity of these loans and the fact that online retailers are showing that they're mindful of their target consumers' financial health, with people willing to stretch payments for relatively small purchases.

BNPL Makes Luxury Accessible

In the bid to appeal to more consumers, retailers are increasingly turning to BNPL options to promote consumer loyalty amongst their customer base. Whether online or in person, shoppers are being offered the chance to pay in interest-free installments.

Especially for younger consumers, brands and retailers are recognizing the growing popularity of BNPL as a means to affordability. From Saks Fifth Avenue to Sephora to Target, retailers are partnering with BNPL providers such as Klarna, PayPal, Affirm, and Apple Pay Later. The U.S. is now the biggest market for Klarna, with a 71 percent year-over-year increase in gross merchandise value (GMV) last year compared to 2021.

The most common BNPL orders in the U.S. are clothing and accessories, electronics, and home furnishings, with more than 30 percent of shoppers using BNPL services to spend on luxury items such as designer clothing, jewelry and handbags. And according to the latest research, shoppers who use BNPL are likely to be repeat customers, further emphasizing how BNPL options are making expensive luxuries seem more affordable.

Risks Involved With BNPL 

BNPL options vary from provider to provider, but the retailer always receives the full payment at the time of purchase. The BNPL provider carries the credit risk for a small processing fee and a slice of the transaction. This method provides retailers with all the rewards and none of the risks, in theory. In practice, though, purchasing via BNPL can result in some complications.

For example, though the payment agreement is with the lender rather than the online retailer, customers must notify both parties if they're making a return and/or requesting a refund to avoid any additional transaction fee or interest. The complicated structure of the associated policies with BNPL maximize the risk of damaging or influencing customer loyalty. Retailers must keep this in mind as, according to PFS research, two-thirds (67 percent) of shoppers admit that they're put off a retailer entirely if the returns process is too difficult.

Adding to concerns, many BNPL providers don't report the use of their services to credit bureaus and, as Fitch Ratings recently pointed out, lenders could underestimate a borrower’s debt level. The BNPL consumer repayment method isn't currently regulated, meaning customers have little protection in the event of any financial dispute. Online retailers and brands should also be aware of the fraud threats connected to this method of payment as it grows and stay up-to-date on industry trends and the latest fraud prevention tools.

Despite its challenges, BNPL is becoming more popular around the globe, and it's no longer enough to only offer cards as a payment option online.

Protect Customer Satisfaction With Seamless Reverse Logistics

Shoppers have grown accustomed to easy refunds and returns, but as mentioned previously, BNPL options often complicate the process. Return policies vary across BNPL providers and online retailers and brands may also have their own rules for BNPL returns. For example, some may allow online BNPL purchases to be returned in-store while others won’t. In many instances, shoppers must first request a refund from the retailer and continue to make payments to the BNPL provider until the return is approved or processed, with the funds then reimbursed within a set period. With the potential negative impact on customer loyalty, retailers must take all of this into consideration and ensure their policies work to provide a positive customer experience despite the additional considerations.

Although BNPL processes might be time consuming to some on a financial/admin level, this doesn’t need to be true in a distribution center (DC) setting. Online retailers and brands must reimagine returns as an opportunity to reduce unnecessary touchpoints, waste and overhead. In addition to the DC, they also need to consider how to incorporate and manage in-store and curbside returns for BNPL customers.

It was estimated that about $158 billion of merchandise sold during the 2022 holiday shopping season would be returned. While some retailers are rethinking their e-commerce returns policies — e.g., shortening the return window or even charging a return or restocking fee — there’s a bigger picture to consider with the increasing adoption of BNPL. To keep customers happy and loyal, brands should seek to create a process that allows in-store drop-offs while educating consumers about how to request prompt refunds through the third-party provider. Implementing the correct e-commerce returns strategy can improve product turnover as well as create transparency for customers making returns, with the hope of retaining their loyalty in the future.

Overall, brands and consumers alike stand to benefit from BNPL options. In these uncertain times, BNPL can make even the biggest-ticket items seem affordable. Shoppers feel as if they have more control over their buying options, enhancing customer satisfaction while building brand loyalty through the enablement of alternative payment methods. As with any new solution, questions will naturally follow. But with the growing popularity of BNPL, it appears these flexible payment methods are here to stay. As such, brands and retailers must establish policies and procedures that work for the customer to ensure continued acquisition of long-term brand loyalty.

Kamran Iqbal is a commerce strategist with PFS, an e-commerce fulfillment provider.