How Retailers Can Offer BNPL Without Being Burned

Buy now, pay later (BNPL) has quickly become one of the most attractive offerings for new customers and essential to enhancing the overall customer experience. Meeting shoppers where they stand financially in response to rising insecurity is a good thing for retailers. That shouldn’t change. However, late payments on these loans are increasing and brands are beginning to suffer. New data from LendingTree identified that 47 percent of BNPL users admitted to paying late on one of these loans in the past year. At the same time, more than half wouldn’t make ends meet without them.

As a result, small business retailers may feel they have no other choice than to consider eliminating the BNPL option altogether. But doing so could risk their ability to compete with larger players who can naturally handle unpredictable cash flow and inventory-to-profit disparities better. Just last month, 36 percent of small business owners reported they’re losing ground to larger competitors. Thankfully, those torn between offering the flexibility of BNPL and safeguarding their financial health can do both with a few simple, necessary protections.

Start by Repairing

While many companies choose to offer BNPL through a credited third-party provider who assumes risk, this isn’t always the case. Given the often-hefty fees associated with using these platforms, small businesses are more frequently the ones choosing custom, in-house layaway options. When that’s the case, those currently navigating payment delinquency should first look into recovering a fraction of these payments to regain a bit of stability. Key word here is a fraction, as some losses may unfortunately remain as that.

• Prioritize by expected recovery. Not every delayed BNPL payment is equal, in size or likelihood of recovery. Focus on the biggest balances first and those only mildly late. This maximizes the chances of recovery and dollar return per hour spent chasing.
• Offer settlement invoices. For accounts with longer delinquencies of over one month to two months, settlement invoices can be an easy way to increase the likelihood of recovering at least some payment vs. no payment. Plus, once those balances are cleared, it raises the chance these customers return since outstanding charges are no longer hanging over them.
• Require pre-payment in the future for customers. Each delinquent customer offers a lesson learned. Analyzing account history to identify repeat offenders and require upfront deposits or capping order value for these individuals can prevent situations from happening again.

Restructure Guidelines

From there, businesses can look into future safeguards limiting the likelihood of offenders and the overall negative impact to the bottom line.

• Choose the right BNPL provider. Custom, in-house options expose retailers to the highest level of risk. Choosing a BNPL provider that assumes liability is key, but so is negotiating the right terms. For instance, a smaller retailer may benefit most from agreeing to a percentage-based pricing model vs. a flat fee, which may penalize small orders.
• Tighten who gets access. Tightening access isn’t only beneficial for avoiding late payments, but also for controlling profitability. For example, setting a minimum order value for BNPL purchases encourages lower-value baskets to be paid in full immediately while also limiting the amount of loan servicer fees.
• Implement shorter or adjustable payment windows. While payment windows shouldn’t be too short for the tighter-wallet customer, the sweet spot is typically four weeks to eight weeks. As every business and customer profile is different, consider adjusting payment windows based on purchase order. For example, three weeks to five weeks for purchases under $300; five weeks to seven weeks for purchases around $500–$750; and eight weeks to 10 weeks for purchases ~$1,000-plus.

BNPL should benefit both the customer and the retailer. If this isn’t the case, then making a few targeted adjustments can ensure a solution that works for both.

Petr Marek is the founder and CEO of Invoice Home, an invoice generating platform designed for small businesses, freelancers and entrepreneurs. Invoice Home currently has more than 12 million users worldwide.