Despite its popularity with younger generations, the buy now pay later (BNPL) sector experienced a series of hurdles throughout 2022. Klarna, a heavyweight in the financial industry, witnessed its value nosedive from an impressive $46 billion valuation at the start of that year to a mere $7 billion by mid-July; an approximate 85% shrinkage.
Investor concerns were fueled by possibilities such as an impending recession or a decline in consumer purchases of high-cost goods. However, these challenges have not diminished the enthusiasm of customers or retailers toward engaging with BNPL options.
As reported by Global Newswire, projections place the US BNPL market size at $9.20 billion USD by 2030, with a projected annual growth rate of 24.3% from 2023 to 2030. Clearly, despite the post-pandemic downturn, these figures depict a flourishing sector that warrants attention.
Why BNPL?
The BNPL model is essentially a modern twist on the old-school layaway scheme. They’ve been in existence for some time. In the digital version, external providers like Klarna or PayPal collaborate with retailers to facilitate shoppers in dividing their purchases into several payments. Unlike the traditional layaway, customers using BNPL plans can receive their goods before completing all the payments.
Furthermore, BNPL plans eliminate the extra costs commonly linked with financing purchases, such as credit card interest. These plans are increasingly favored, especially by younger customers, due to their convenience and low-to-no interest fees.
BNPL offers both affordability and flexibility to consumers. The loans are short-term, normally repaid in a down payment and three subsequent installments over a few weeks or months. This eliminates the need for a constant line of credit from a bank.
Retailers also see advantages. BNPL providers ensure immediate payment, regardless of the buyer paying in installments. As a popular, hassle-free payment method, BNPL can act as a customer attractor, offering a competitive edge to merchants over slower-to-adapt rivals. Such benefits foster a positive customer experience, enhancing long-term customer value.
What About Fraud?
Like any payment platform, BNPL is not without flaws. For customers, it typically won’t aid credit scores, as most providers don’t report payment data to credit bureaus. Usually, only missed payments that lead to collections are reported, leading to only negative data being reflected.
Moreover, BNPL plans are susceptible to fraud, mainly through synthetic identity fraud and account takeover. Synthetic identity fraud is when scammers create a false identity using stolen information to open new accounts and make purchases, with no intent to pay it back. Tracking these culprits is challenging due to the made-up identity used.
On the other hand, account takeover fraud happens when a fraudster acquires a user’s login credentials, possibly through phishing or via the dark web. With access to a legitimate account, they can make purchases using BNPL across various sites accepting the said provider.
Furthermore, extending payments over time offers fraudsters a larger window to strike. Since payments are delayed, account owners may not detect fraud for weeks.
Consumer Conduct & Other Risks
The availability of a BNPL option could lure consumers into overspending. Once bi-weekly payments begin, the financial strain may be felt more intensely than initially expected.
One of the primary reasons for chargebacks in eCommerce is buyer’s remorse. The purchaser regrets their decision and views a chargeback as a swift way to reclaim their money, epitomizing first-party fraud.
BNPL could also be linked to another consumer behavior posing an escalating risk to merchants: return fraud. This occurs when a customer tries to deceive a merchant through their return process, including tactics like bricking, price swapping, and receipt fraud.
As the expectation for returnless refunds grows, customers may view this as yet another chance to retrieve their money without returning the product.
These issues are escalating. The 2023 Chargeback Field Report revealed that, over the past three years, two-thirds of the merchants surveyed have experienced an increase in first-party (or “friendly”) fraud.
More Oversight is Needed
Right now, the official regulation concerning BNPL is a bit of a mashup. The services are not subject to the same rules as traditional payment methods. Thus, economists worry about varying terms and conditions paired with limited checks and balances.
There has been some momentum on this front. The US Consumer Financial Protection Bureau announced it was looking into BNPL as early as December 2021 with the goal of possibly creating regulations to protect consumers.
In the meantime, the onus is on buyers to carefully consider their budget over the duration of payment before completing a BNPL purchase. This will help them avoid financial predicaments by ensuring they can make the payments agreed to at the time of purchase. It’s also important for consumers to understand any fees, including penalties for late payments, that they might accrue when taking advantage of BNPL options.
More regulation will likely be necessary as BNPL matures into a conventional, standard payment option. The model could present major problems if left without needed oversight.
If consumers are unable to pay back what they owe, BNPL providers could find their balance sheets suddenly weighed down by the burden of increased debt. Depending on the degree of integration these companies have with conventional financial institutions, this could create a cycle of credit lock-up akin to what was observed in 2008. At the very least, it could shake consumer confidence, putting the stability of global markets at risk.
The bottom line: both merchants and consumers appreciate the flexibility and convenience of BNPL. However, they must have a mutual understanding of the terms of service. Otherwise, this bold new direction for commerce could spiral into a problem for payments and finance writ large.
Looking to the Future
Currently, BNPL’s regulatory landscape is somewhat disjointed, as these services are not held to the same standards as traditional payment methods. This leads to concerns about inconsistent terms and conditions, coupled with limited oversight. However, regulatory momentum is building, with the US Consumer Financial Protection Bureau examining BNPL for possible consumer safeguards as early as December 2021.
For now, it’s crucial for customers to meticulously assess their budget before opting for a BNPL scheme, thereby avoiding financial hardships. They should also be well-informed about any fees or late payment penalties.
As BNPL becomes more mainstream, increased regulation will likely be needed to prevent potential issues. If left unchecked, and consumers default on repayments, BNPL providers may face growing debt burdens. This could potentially lead to a credit freeze similar to 2008 and destabilize global markets by undermining consumer confidence.
Ultimately, while both merchants and consumers value the convenience and flexibility of BNPL, they must be mutually aware of the service terms. If not, this innovative commerce approach could create broader problems for the payments and finance sectors.
