Potential Risks of BNPL For Consumers
Limited Qualification Standards
Unlike credit card providers, BNPL providers are not obligated to qualify a consumer’s ability to repay loans. Most BNPL providers only perform a soft credit check during the registration process, so consumers with bad or no credit might easily be approved. If they use multiple BNPL services, these consumers can potentially get into an unmanageable debt load.
A U.S. consumer research study conducted among BNPL users found that 74% of those surveyed made all their BNPL payments on time, 14% missed a payment once, and 12% missed a payment more than once.
Increased BNPL Usage
According to the latest MNP Consumer Debt Index report, almost 58% of Canadians plan to borrow more money before the end of this year. The COVID-19 pandemic has led to an increase in BNPL purchases due to the rise in online shopping. This trend is expected to continue into the 2021 holiday shopping season. However, consumers should be aware that the availability of BNPL credit during checkout could encourage impulse buying.
Challenges of Multiple Purchases
A recent study of BNPL users in the U.S. found that 16% made five or more purchases using BNPL in an average month. Users who make multiple purchases using different BNPL providers might face difficulty in managing and keeping track of their purchases, leading to late and missed payment fees, which is a potential risk for consumers.
Beyond Immediate Consequences
It’s important to consider the potential risks of using BNPL services beyond immediate financial consequences. Typically, BNPL users are younger, and if they face financial difficulties, it might affect their ability to obtain credit or certain types of employment in the future.
Credit Reporting Practices
Some BNPL providers like Sezzle don’t report their customers’ payment activities to credit bureaus, while others like PayBright, Afterpay, and Affirm do. Customers who default on loans or make late payments will affect their credit scores, decreasing their chances of getting future loans.
Potential Risks of BNPL For Merchants
While accepting BNPL customer payments can benefit merchants, it also poses certain risks.
Coping with Increased Transaction Costs and Customer Choices
Merchants often pay a transaction cost between 2% to 8% of the purchase price, higher than the standard 1% to 3% cost of credit or debit card transactions. Therefore, merchants must increase their sales volume to offset the added cost. However, offering BNPL as a payment option may also prompt customers to switch from lower-cost payment options such as credit, debit, and prepaid cards, potentially harming the merchant’s bottom line.
Merchants should carefully assess whether a BNPL strategy aligns with their business and determine the minimum transaction value that would justify offering BNPL as a payment option. The primary goal of providing BNPL as a payment option is to attract new customers. However, merchants need to be aware that BNPL providers may limit the number of concurrent loans a consumer can have, impacting the ability to maintain a recurring relationship with the customer.
Balancing Risk and Reward with BNPL Service
Merchants should consider the risk of reaching a point where the cost of accepting BNPL exceeds the value. However, once BNPL becomes widely used, discontinuing it may not be possible for merchants even if the cost outweighs the benefit. Regulatory intervention may be necessary to decrease the cost. Additionally, BNPL services may pose a risk to customer relationships regarding product returns. While BNPL purchases have a lower return rate, the returns process can be cumbersome for the customer. In some cases, BNPL providers may hold the customer liable for the total purchase cost, even after the item has been returned.
Does Your Business Accommodate BNPL?
In the ever-evolving landscape of retail, staying ahead is key. Buy Now, Pay Later is not just a trend; it’s a transformative tool that can elevate your business.
By offering BNPL, you unlock the door to increased revenue, reduced cart abandonment, enhanced customer retention, and faster settlements. As consumers increasingly seek convenience and flexibility in their payment options, BNPL can be a great solution. It also means expanding your customer base and solidifying your competitive edge.
Speak to one of our advisors to upgrade your payment processing options. Call us at 1.866.286.7787. Alternatively, you can get a quote.