How BNPL Can Become Too Much of a Good Thing for Retailers

Buy now, pay later (BNPL), a modern answer to retail layaway, is having a moment as a key payment option for online shoppers. It’s simultaneously soaring in popularity and finding that celebrity inevitably attracts those who would like to take advantage.

BNPL, which allows shoppers to get their goods today while paying in installments, now accounts for nearly $100 billion in global e-commerce transactions, according to the payment processing firm Worldpay. The figure is likely to double soon, the processing firm says — and that’s not counting brick-and-mortar sales.

More than 40,000 U.S. retailers provide BNPL options, and Signifyd’s Ecommerce Pulse data shows that BNPL transactions increased 78 percent year-over-year in 2021 alone. The feature is popular for good reason: It means higher order values and conversions for retailers and greater buying power and flexibility for consumers, all of which adds up to increased customer lifetime value.

However, this added buying convenience paradoxically offers another avenue to commit return abuse and fraud.

Consider the practice of “bracket buys.” Bracketing is a form of potential policy abuse in which a customer purchases several similar versions of the same article of clothing in order to try different sizes or colors. The customer then returns all but one version, an expensive proposition for a retailer.

Someone seeking to buy 10 pieces of clothing on a modest budget with a debit card may not qualify based on the size of their bank account. A low credit limit might hold back a credit card user. However, if the customer can split the payment into four installments and get a refund for nine of those garments before the total bill comes due, it’s altogether doable.

One interesting wrinkle: BNPL is dominated by Gen Zers, the demographic cohort born after 1997. A lot of them only shop if they can do so by making payment installments over time — a buying preference that’s clearly contributed to the recent rise in the popularity of BNPL.

Meanwhile, tens of millions of people stuck at home during the pandemic have passed the time shopping online. BNPL just made the idea of buying now and delaying any payment that much more appealing.

Of course, it also presents new opportunities for bad actors, reducing the necessary investment for serial wardrobers, bracketers and others to outfit their closets for free. They buy and wear expensive clothes, all the time intending to ship them back after using them for a while. Some of this would have occurred in any event, but the pandemic just exacerbated the usual online vulnerabilities that attend e-commerce.

While the return scofflaw's wardrobe benefits, the merchant loses out, paying additional shipping costs and losing the opportunity to sell the items to a legitimate customer.

And bear in mind that for every dollar that gets returned, it costs the retailer about 3.7 times that amount in total costs to ship, return ship, process and restock the item — or dispose of it if it’s in poor condition or out of season or style. These accumulated costs of logistics, restocking and disposal can leave a big hole in merchants’ bottom lines.

While some returns are inevitable, the National Retail Federation (NRF) concluded that 10.6 percent of online returns are fraudulent, costing retailers billions a year.

Retailers don’t need to accept the inevitability of losses caused by bad actors as a cost of doing business with BNPL — and they shouldn’t because this problem will continue to grow. With large transaction networks and machine learning decision engines, they can mitigate that behavior by analyzing billions of orders from merchants around the world to proactively spot repeat abusers and stop bad returns before they become a painful cost of doing business.

Eleanor Ritchie is the Signifyd senior product manager who was instrumental in developing the company’s Return Abuse Prevention solution.