By Monica Eaton-Cardone, COO and Co-Founder of Chargebacks911. 

 

“Buy now, pay later,” or “BNPL” plans are increasingly embraced by both merchants and consumers as an alternative payment method. BNPL offers a way to make purchases now, stretch payments out over several weeks, and do it all without any existing line of credit.

Merchants are also seeing the benefits of BNPL, according to findings from the recently-published 2022 Chargeback Field Report. A joint endeavor between Chargebacks911 and Card Not Present, the survey-based study shows that more and more merchants are offering alternative payment options in general. The number of retailers offering BNPL options, specifically, grew by 20 percent in 2021.

BNPL made up nearly 2.5 percent of the global eCommerce market in 2021. That’s fine for online merchants, but what about brick-and-mortar? Is buy now, pay later a viable option for more traditional businesses?

The answer is yes. Not only is offering BNPL a good choice for physical stores, it may be a necessity if merchants want to keep their business competitive.

BNPL: The Modern-Day Layaway

When it gets right down to it,  the concept of Buy Now, Pay Later really began with physical stores. At the time, it was called a layaway plan, and it became popular during the Great Depression.

This option continued to gain popularity during the postwar era, and by the 1970s, large chain stores were offering it to customers as a standard payment option. But, as consumers became increasingly comfortable with credit card usage, layaway plans seemed to lose their appeal.

By the early 2000s, many merchants dropped the layaway option altogether as a relic of an earlier age. But, with the arrival of new payment technologies, the ability to buy now and pay later seems to have recaptured consumers’ interests.

Understanding BNPL in Context

Buy now, pay later differs from layaway in one key area: with layaway, the customer didn’t get their merchandise until the final payment was made. Instead, the retailer would pull the merchandise and store it while the customer paid installments. The whole process was largely performed in-store.

BNPL customers, on the other hand, can receive their goods with a simple down payment. Retailers rely on a service provider like Klarna, who essentially provides the buyer with a short-term loan, plus handles all the management.

The transaction amount, minus fees collected by the service provider, goes to the merchant at the time of sale. They get full payment, and shoppers split the cost of their purchases into multiple installments with minimal or no finance charges.

Use of BNPL soared during the Covid crisis. It was a great option for consumers who needed a little flexibility amid the uncertainty of the time. Being able to pay across installments increased the consumer’s buying power, so price tags become a little less relevant in purchase decisions. And, while credit cards have a higher barrier to entry, BNPL is less dependent on the consumer’s past credit usage.

However, the steady return to pre-pandemic activities has birthed a type of hybrid consumer. Today’s buyers are showing they’ve come to appreciate the flexibility, immediacy, and low-cost payment options available through BNPL providers.

Merchant Benefits of BNPL

Merchants who question whether BNPL will work for physical checkouts need only look at furniture or mattress retailers. How often have you seen stores market “six months/no interest” options to consumers?

Offering BNPL payments may help merchants boost sales tickets and attract and keep customers. For example, a buyer who cannot afford an item at the moment may feel that ordering the same item online is their best option.

Highly respected brands are jumping on the bandwagon. Retailers who have rolled out alternative payment options report measurable business results—including higher average order values—from offering BNPL plans.

By broadening payment options, merchants make it easier for visitors to become buyers “in the moment.” Along the same lines, a positive BNPL experience may bring the customer back to the store, increasing loyalty and long-term customer value.

Does BNPL Increase Fraud Risk?

Like any new technology, a buy-now-pay-later plan isn’t perfect. These plans are susceptible to fraud and abuse, primarily from two distinct sources: synthetic identity fraud and account takeover.

Account takeover fraud occurs when a fraudster obtains a user’s personal information, either through phishing attacks or by buying it on the dark web. Having access to genuine account data means the crook may be able to opt for BNPL at checkout and use the phony account to pay for purchases.

Synthetic identity fraud involves scammers piecing together bits of information stolen from real people. The fraudster creates a “Frankenstein” identity that can be used to conduct BNPL transactions, with no intention of remitting anything beyond the down payment. And, because the phony identity was created solely to make fraudulent purchases, that “customer” will soon disappear.

On top of everything else, having payments stretched out over time gives fraudsters more opportunities to attack. Due to the delayed payments, the fraud may not be noticed for weeks.

Merchants who decide to offer BNPL will need to work with their providers on things like data security and encryption. The best BNPL partners assume a share of the risk. But, in successful fraud situations, the merchant’s reputation with customers, processors, and financial institutions could take a hit.

Consumer Behavior Presents Further Risk

Access to a buy now, pay later option might also tempt consumers to spend beyond their means. Then, once the buyer begins making that bi-weekly outlay, they could start to regret making the purchase.

Buyer’s remorse is one of the leading causes of chargebacks in card-not-present eCommerce. Chargeback misuse is a first-party threat source commonly referred to as friendly fraud.

BNPL may also be associated with return fraud. This is another consumer practice that presents a growing threat to merchants. Return fraud happens whenever a buyer requests a return without a valid reason to do so, regardless of whether they ultimately return the goods.

These threats are getting worse with time. The 2022 Chargeback Field Report went on to show that, among merchants who noted a change in friendly fraud over the last three years, two-thirds of them reported an increase.

For the time being, buy now, pay later services are not subject to the same rules as other credit products. Government oversight is still fairly loose, but that may be changing.

The US Consumer Financial Protection Bureau has announced it is looking into BNPL, with the goal of possibly developing a set of checks and balances to protect consumers. These new regulations will probably affect BNPL merchants across the board, but there may also be rules that impact in-store use specifically.

Getting Started with In-store BNPL

Despite the risks, the buy now, pay later game is still an option worth considering.

The number of BNPL providers with options for merchants is growing, which means merchants have more choices. When researching potential BNPL partners, there are several factors to consider.

Ease of use and speed of setup are primary concerns. Both can impact the amount of friction at checkout. Hardware and software requirements, too, should be investigated. While many BNPL services offer native integrations with major payment processors, not all have an in-store version. Also, some POS providers do not yet offer an integration with any given BNPL company.

Finally, different BNPL services have different payment plans. It’s important that merchants understand the provider’s requirements, including set-up fees, per-transaction costs, and details of any contract that will be signed.

The Bottom Line

Shoppers have shown that they like having the option of installment payments. Therefore, retailers who provide this type of payment plan in their stores may gain a competitive edge. At the same time, consumers who are careless with their resources may find themselves overextended, which can lead to vulnerabilities.

BNPL providers are finding themselves under growing pressure from financial experts. That said, calls for stronger oversight may be a good thing, in terms of safeguarding customers and leveling the retail playing field.

In simple terms, customers are returning to brick-and-mortar stores for shopping, but they expect easy, flexible payment options at the point of sale, now more than ever. Merchants who provide a choice in payment options are likely to reap substantial benefits.