How Buy Now Pay Later Could Hurt Retailers' Bottom Line

With the increase in overall cost of living, Buy Now Pay Later (BNPL) services have become a hit with consumers.

It makes sense when you think about it. Consumers can buy bigger ticket items at higher prices without having to pay the full price upfront. It can be easier to spread out their payments into smaller amounts (paid in three or four installments).

In 2023, the global market size for BNPL was valued at $30.38 billion. By 2032, that number is projected to reach $167.58 billion. That’s probably because the number of people using BNPL is quickly climbing. BNPL users are expected to spend $18.5 billion during the 2024 holiday season alone.

While consumers may love BNPL, it doesn’t always translate to bottom line growth for retailers. There’s the 2-8% transaction fees that come with BNPL purchases – those can eat into retailers’ profit margins. There’s also a higher likelihood of defaults and risk of fraud. Let’s explore some of the cons of offering Buy Now Pay Later as a payment option.

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Chapter 1

1. BNPL transaction fees can eat into profitability

Retailers are fans of BNPL because it can encourage more spending from their customers. The overall spend can increase because consumers know they have more flexibility to purchase more expensive items, or to shop more often. But on the other hand, consider how BNPL providers make their money. Without adding interest, BNPL providers rely on merchant fees to support their own bottom line.

I know – that's nothing new for your business. Credit card providers charge an average of 1%-3% fee every time a customer swipes a credit or debit card. But BNPL providers tend to charge higher fees to support their own profitability, since they don’t usually charge interest to consumers. You’ll be looking at fees between 1.5% to a whopping 7%, depending on the product and your BNPL provider. And when your customers are using BNPL at increasing rates, it can slowly but surely start impacting your profitability.

Chapter 1

2. More refund requests will drive operational costs up

A recent study by Splitit found that Gen Z, the leading cohort of BNPL users, often use BNPL to justify impulse purchases. In fact, 44% of Gen Z BNPL users admit to using BNPL to “rationalize large impulse purchases.” And CapitalOne found that impulse shoppers spent roughly $1812 per year each on their last-minute purchases.

You might be tempted to think that only means good things for your business. It's always good news when consumers make bigger purchases, right? Not necessarily. In 2023, the annual cost of returns for retailers totaled $744 billion. On top of that, a study from SimplicityDX found that 56% of consumers who recently made an impulse purchase regretted it. Increased impulse buys could lead to more returns, which could drive your costs up – and cash flow down. The logistics of transporting returns, storing returned items in warehouses, additional customer service to process returns and the operational costs of managing it all add up quickly. And then when you add the fact that the value of the item itself has gone down in value, it’s easy to see how quickly returns could start to impact your revenue. Plus, the return process with BNPL could need to be changed to accommodate requests routed through BNPL providers. That complicates your processes, adding extra steps that could add to the cost of returns for your business.

Chapter 1

3. BNPL profit model is questionable

Let’s pretend you’re being offered the chance to invest in a business. When you look at the business model, you see that, on average, each $100 customer sale earns you $4.56, with $4.75 in expenses on your end. Would you invest?

That’s exactly how the Buy Now Pay Later profit model is organized. Most BNPL providers count on customer late fees and retailer charges to maintain their profitability. So, while it can lead to more overall purchases from your customers, your business might not actually see that boost as easily.

BNPL providers also have extremely tight margins, which could make it risky for your business to work with them. If your customers depend on BNPL products to afford what you’re selling, any financial issues within BNPL providers could mean you see a sharp decline in your customers’ spending power.

Chapter 1

4. Lax ID verification processes open the door to fraud

Typically, BNPL checks are less stringent than traditional credit. For instance, BNPL providers don’t require a credit check and the process is much less regulated than traditional credit card options. Fraudsters use this to their advantage to buy big-ticket items without ever even having to pay for them.

Consumers love BNPL for its ease of use. Rather than spending a long time with credit checks, users can usually just opt into BNPL. But without those credit checks and other verification, how can you be sure that your customers are legitimate? Fraudsters are more easily able to steal from your company or use BNPL for illegal purposes like money laundering with overly-relaxed ID verification.

About the Author

Lina Chindamo, DIrector, Enterprise Accounts, Creditsafe

Lina Chindamo is currently Director, Enterprise Accounts at Creditsafe Canada, and a Certified Credit Professional (CCP) with over 25 years of experience in credit risk management. She has held senior leadership roles with leading companies in multiple industries in the Canadian market such as Sony Electronics, Maple Leaf Foods, and Mondelez Canada. Her experience as a credit professional along with her current role as Director, Enterprise Accounts who works closely with c-suite partners and credit teams across all industries makes her a well-rounded credit professional who is well respected in our industry.

How Buy Now Pay Latter Could Hurt Retailers' Bottom Line

With the increase in overall cost of living, Buy Now Pay Later (BNPL) services have become a hit with consumers.

Have you checked the financial health of your BNPL providers?

Enter a company name to view a free business credit report

1. BNPL transaction fees can eat into profitability

2. More refund requests will drive operational costs up

3. BNPL profit model is questionable

4. Lax ID verification processes open the door to fraud

About the Author

Have you checked your company's credit risk?

Enter a company name to view a free company verification report.

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