Interviews, insight & analysis on digital media & marketing

Buy now, pay later… But at what cost to your business?

By David Purnell, Manager, UK and EU payments at PFS

In a bid to appeal to more consumers, retailers are increasingly turning to buy now, pay later (BNPL) options to promote consumer loyalty amongst their customers. Whether online or in person, shoppers are being offered the chance to pay in interest-free instalments. In 2022 services like ClearPay and Klarna became popular, with Klarna being used by 20,000 merchants in the UK

As of 2022, around 360 million people globally and more than 17 million consumers in the UK have used BNPL services. Electronics are the most common spend, and almost one-quarter are purchasing luxury items such as jewellery and handbags, further emphasising how BNPL schemes are making expensive luxuries seem more affordable. 

BNPL services typically offer no-interest, short-term loans and sometimes charge no fees, even on 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.

It is estimated that BNPL debt accounts for up to 30 per cent of some online retailers’ sales, with the BNPL provider carrying the credit risk for a small processing fee and a slice of the transaction. This provides retailers with all the rewards and none of the risks, in theory. Yet when it comes to returns, the process is often convoluted.

BNPL options vary based on 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 retailer, customers must notify both at the time of their return and/or refund request, presenting a far more complicated process than they might have experienced before.

Risky business – With the ongoing cost of living crisis and recession predicted to last until the end of 2023, online retailers and brands are already struggling financially. Online retailers and brands should be aware that as this method of payment grows, so will the threats of fraud connected to it. They must stay up to date on anti-fraud prevention tools and be aware of news to avoid being caught off guard.

Customer experience – People have gotten accustomed to returns being simple when something is bought online. With BNPL being relatively new, return policies vary from company to company. The hassle of a return policy has the tendency to negatively impact customer loyalty towards an online retailer they might have been associated with for a long period of time.

Many customers have experienced trouble when it comes to returns due to the complicated structure, maximising the risk of damaging or influencing loyalty. According to PFS research, two-thirds (67%) of shoppers admitted that they are put off a retailer entirely if the returns process is too difficult.

Logistics and stock management – Although BNPL processes might be time-consuming to some, this doesn’t need to be true in the warehouse setting. Online retailers and brands must reimagine returns as an opportunity to reduce unnecessary touchpoints, waste and overheads while recovering more lost profits. Consumers love shopping online, but they don’t always enjoy the online return experience. Online shoppers have come to count on, not only free shipping, but free returns as well. Experts say retailers can expect, about $158 billion of merchandise sold during the holiday shopping season to be returned on an average. While some retailers are rethinking their eCommerce returns policies – shortening the return window or even charging a return or restocking fee – there’s a bigger picture to consider. To keep customers happy and loyal, brands need to create a process that is customer friendly. 

Studies show the benefits retailers stand to gain by offering pay-over-time options to customers. These can include higher average order values (AOV) and conversion rates, along with lower cart abandonment and customer acquisition costs. The increased likelihood of repeat purchases and customer satisfaction can add more loyalty for a retailer.

As with any new solution positioned to advance customer loyalty, questions will naturally follow. Such is the case with BNPL yet the surging popularity and use of the system by several popular retailers, suggest that BNPL methods are here to stay.