Buy Now Pay Later Chargebacks

Table of Contents

1. What Is Buy Now, Pay Later (BNPL)?
2. How Do BNPL Services Work?
3. What Kinds of BNPL Options Are Available to Merchants?
4. What Kind of BNPL Fraud Is Out There?
5. Navigating the BNPL Market: Choosing the Right Provider
6. How Do BNPL Services Affect Chargebacks?
7. The Risks of BNPL
8. What Are Buy Now Pay Later Apps?
9. Does Amazon Do Buy Now Pay Later?
10. What Are the Most Popular Buy Now Pay Later Services?

In part due to the COVID-19 pandemic, a number of alternative payment methods have been on the rise in recent years. Contactless payments like Apple Pay grew in use as customers grew more cautious about touching payment terminals. As many turned to e-commerce, online payment methods like PayPal gained new customers. Curiously, however, one of the hottest alternative payment methods is also in a way one of the oldest: buy now, pay later (BNPL).

At its core, BNPL isn't much different from the old-fashioned installment plans that date back centuries. However, there's one big twist that's made these particular installment plans really take off: third-party providers. When using a BNPL provider, the merchant gets paid immediately. Then its the provider's responsibility to collect installment payments from the customer. For the merchant, that means they can allow customers to pay over time without taking on any additional financial risk.

These providers pay merchants up front for purchases made using their service, then recoup their money over time from the customer. That means merchants can provide the convenience of paying in installments without taking on the financial risk. What do merchants need to know about how BNPL works, the benefits it can provide, and the risks associated with it?

Like credit cards, BNPL services can help customers stretch out payments for large purchases that they otherwise wouldn’t be able to afford, but they’re accessible to customers who don’t have access to a credit card or don't want to use one. This can be especially valuable for younger customers, who are often reluctant to sign up for credit cards with high interest rates and unable to qualify for cards with lower interest.

While there’s nothing stopping merchants from implementing their own in-house BNPL plans, many merchants choose instead to contract to third-party providers who deal with management of the installment payments.

Services like Affirm, Klarna, and AfterPay allow shoppers to exercise the BNPL option at a wide range of e-commerce stores. Interest in BNPL services is booming — more than a third of US customers have used it in some form, and its share of the global e-commerce market continues to grow.

Most analysts will cite bad credit or fear of credit card debt as one of the primary drivers of BNPL’s growth, and the generation that grew up in the shadow of the 2008 financial crisis has understandable reasons to be wary of big banks and their traditional credit instruments. BNPL allows these customers to pay for big purchases in a manageable way.

BNPL plans have advantages for merchants as well. Those who sell high-value goods may be able to attract new customers who would otherwise shy away from spending so much money all at once. BNPL can also reduce shopping cart abandonment caused by sticker shock.

Some BNPL services offer a fixed number of installments while others allow the customer to choose the installment plan they prefer. One of the more common plans is splitting the purchase into four installments with a payment made every two weeks. In most cases, short-term BNPL plans don't charge the customer interest, while plans with longer terms do.

Customers are typically charged late fees if they don’t make their installment payments on time and may be reported to credit bureaus. They're also cut off from making new purchases with that provider until the situation is remedied.

Once the plan is approved and created, the merchant receives payment in full from the provider. Most BNPL providers have a quick approval process that involves a “soft pull” of the customer’s credit history that will not affect their credit score.

There are also some less common models for BNPL providers: Some providers invoice the customer for repayment in full after a set period of time, and some credit card issuers offer their customers BNPL plans with a set repayment schedule and a lower interest rate than the credit card itself.

With merchant transaction fee loans, a loan is provided to the customer at the point of sale. No interest is charged to the customer as long as they make their payments on time. Instead, the merchant is charged a transaction fee.

Merchants typically pay the BNPL provider between 2% and 8% of the purchase amount, and in some cases a small per-transaction fee. Providers typically don't disclose their pricing up front, so merchants interested in pursuing a relationship with a BNPL provider should expect to go through a process of registering an account and submitting business information to receive a quote.

While the fees a merchant pays to buy now pay later services might seem steep, these services can bring in customers and encourage purchases that might not otherwise be made, especially when the offered installment plans don't charge interest.

BNPL services can be particularly valuable for merchants who sell goods or services that come with a hefty price tag, as the option to pay nothing up front can help hold onto customers who might otherwise be driven away by sticker shock. Different BNPL providers have claimed increases in average order value ranging from 40% to 85% for merchants who partner with them.

With shopper interest loans, no fees are charged to the merchant, but the customer pays interest as part of their installment plan. This makes BNPL a more attractive option for merchants, but a less attractive option for their customers, reducing some of the benefits of offering it.

Offering BNPL options can be particularly valuable during the holiday season, when customers increase their spending buying gifts for friends and loved ones. Many customers are highly conscious of the extra strain put on their accounts during the holidays, and the option to reduce the immediate pressure by spreading the payments out over several months can be very attractive.

Navigating the BNPL Market: Choosing the Right Provider

Choosing the right Buy Now, Pay Later (BNPL) provider is a critical decision for merchants seeking to integrate this payment option into their business model. With a plethora of providers available, each offering unique features and terms, understanding key considerations can streamline the selection process. Let's explore the factors merchants should weigh when selecting a BNPL provider.

Provider Reputation and Trustworthiness

The reputation of a BNPL provider plays a pivotal role in the decision-making process. Merchants should conduct thorough research on potential providers, considering factors such as customer reviews, industry ratings, and the provider's track record in handling transactions. Opting for a reputable BNPL provider instills confidence not only in the merchant-customer relationship but also in the reliability of the payment system.

Transparent Fee Structure

The financial aspect of BNPL services is crucial for merchants, and understanding the fee structure is paramount. While many BNPL providers do not disclose their pricing upfront, merchants should seek transparency during the onboarding process. Key considerations include transaction fees, merchant charges, and any additional costs associated with offering BNPL options. This clarity is essential for accurately assessing the impact on the overall profitability of each transaction.

Integration Ease and Flexibility

A seamless integration process is essential for merchants looking to implement BNPL successfully. Providers that offer easy integration with existing e-commerce platforms, point-of-sale systems, and payment gateways can significantly reduce the burden on merchants. Additionally, flexibility in customization options allows businesses to tailor the BNPL experience to align with their brand identity and customer expectations.

Approval Process and Customer Experience

The efficiency of the BNPL approval process directly influences the customer experience. Merchants should prioritize providers with quick and user-friendly approval processes. A swift approval process, often involving a "soft pull" of the customer's credit history, enhances the overall satisfaction of the buying experience. Additionally, a positive customer experience is crucial for encouraging repeat business and fostering brand loyalty.

Range of BNPL Plans

Not all customers have the same preferences when it comes to payment plans. Merchants should consider BNPL providers that offer a variety of installment options, such as fixed-term plans and flexible plans where customers can choose their preferred repayment schedule. Providing diverse options accommodates a broader range of consumer preferences, contributing to increased adoption of BNPL services.

Customer Support and Dispute Resolution

In the dynamic world of e-commerce, responsive customer support is invaluable. Merchants should evaluate the level of support offered by BNPL providers, including their responsiveness to queries and efficiency in resolving disputes. A provider with robust customer support mechanisms ensures that merchants can address issues promptly, maintaining a positive customer relationship.

Selecting the right BNPL provider is a strategic decision that can significantly impact a merchant's success in offering this payment option. By prioritizing factors such as reputation, fee transparency, integration ease, approval processes, plan variety, and customer support, merchants can navigate the BNPL market effectively. A well-chosen BNPL provider not only enhances the customer experience but also contributes to the overall success and growth of an e-commerce business.

Because they aren’t billed immediately, it may take the victim some time before they even realize they’ve been targeted.

The good news for merchants is that most BNPL providers accept liability for the financial cost of fraud when incidents like these occur. However, customers still tend to hold merchants responsible (fairly or not) when they experience fraud, so it’s always in the merchant’s best interests to screen out orders that carry strong fraud indicators, such as:

• New and unusual purchasing behavior
• Logins from new devices or IP addresses
• Multiple transactions within a short period of time
• Changes to the shipping address

Merchants should reach out to customers whose transactions set off these alarms to confirm that they really intended to place the order. Automated anti-fraud tools may be employed to review and flag orders, but beware of relying too much on automation to block fraudulent orders. False positives are not uncommon, and you can alienate your real customers if you don’t take the time to manually review and verify them.

They can try disputing any payments they might have made to the provider, but in the vast majority of cases, the provider will have made the customer agree to terms and conditions that would invalidate the chargeback.

BNPL providers know that while it’s hard to predict the reasons customers might give for fraudulent chargebacks, a well-crafted purchase agreement can serve as compelling evidence in chargeback disputes where the cardholder is claiming merchant fraud or error.

Just make sure you get customers to take some action to indicate their agreement to your terms, such as checking a box or clicking a link, so they can’t claim they were never informed.

For chargebacks related to the delivery or quality of the product, some BNPL providers pass the cost on to the merchant. Merchants should review each provider’s policies on merchant disputes before partnering with them.

While there's no direct risk of chargebacks for merchants when purchases are made through a BNPL service, merchants could see a higher rate of purchases being returned for refunds. Some customers may be more likely to make impulse purchases due to the fact that they won't have to pay anything right away. Then when it's time for the first installment, they might realize they've made a purchase they can't really afford and ask for a return.

Friendly Fraud on Steroids

One of the primary issues with fraud and chargebacks in the BNPL industry is that many providers offer to cover large purchases with very little customer information. In some cases, a name, date of birth, and an ID number (typically a social security number in the US) is all it takes.

This means it's relatively easy for fraudsters to commit identity theft through BNPL. It also means that if a customer claims to be the victim of such fraud, that claim might be difficult to disprove. This could open the door to significant increase in friendly fraud once less scrupulous customers catch on.

The Risks of BNPL

Economic downturns, mistrust of credit cards and big banks, and increased awareness of the perils of consumer debt have created the perfect conditions for BNPL services to thrive. To some, their sudden popularity may be a little concerning. While they may not accrue the same high rates of interest as credit cards, customers can just as easily overextend themselves on BNPL installments and find themselves defaulting on snowballing payments.

One of the most significant concerns is the fact that many BNPL models may not be financially sustainable over time, which means that the terms—and costs—of such plans may be subject to change in the near future, especially as the expansion of major credit card issuers into BNPL space turns up the pressure on smaller, specialized platforms.

As is the case with many new business models, most BNPL companies are probably operating at a loss at the moment, with the goal of expanding their market share before focusing on profitability.

As the industry matures, these companies are likely to start charging either higher merchant fees or higher interest rates. That means BNPL may not be a long-term offering for some merchants, but it also means that now is a good time for merchants to take advantage of these services before prices go up.

One other concern is the interaction between BNPL and currency exchange rates in cross-border payments. Over the duration of the installment plan, the exchange rate between the customer's currency and the merchant's currency may change. Merchants should know in advance whether they or their customers will be asked to compensate for significant changes in exchange rates. For now, the default arrangement seems to be that the BNPL provider absorbs the costs of detrimental changes and the benefits of positive changes. However, merchants should check the policies of their existing or potential BNPL providers.

Right now, merchants are fairly well insulated from the risks associated with BNPL and stand to gain much by expanding their customer base and selling more high-ticket items through BNPL purchases. Just be aware that as BNPL matures, so too will the scams and fraud attacks associated with it. Merchants should do their best to stay on top of anti-fraud news and update their defenses regularly to avoid getting blindsided by evolving cyber threats.

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