What the Buy Now Pay Later Trend Means for Retail and Returns

Buy now pay later (BNPL) companies like Affirm, Afterpay, and Klarna have been quietly building a loyal customer base for the last few years. Today, 56 percent of U.S. consumers say they have used BNPL providers for retail purchases — up nearly 50 percent from July 2020.

Thanks to budget concerns, credit card mistrust, and a COVID-19-fueled increase in online shopping, this e-commerce trend is driving forward. In fact, a report from Bank of America said it expected BNPL services to multiply 10-15 times by 2025. Amazon’s recent partnership with Affirm is also a prime indicator of the growth to come in this sector. This industry is on an upward spike with no peak in sight.

How BNPL Affects Consumers and Retailers

BNPL allows shoppers to buy higher-priced items without any upfront commitment and to pay over time. The bottom line is BNPL allows people to transcend the confines of their monthly budget, which translates to buying more stuff.

Even though BNPL platforms typically charge retailers higher fees (8 percent to 10 percent interest per transaction) than credit card companies, they offer several benefits that make it worth it, including:

• Upfront payments and fewer headaches: When customers utilize BNPL, the service provider pays the retailer the full ticket price upfront and bears the burden of chasing customers for installment payments. The BNPL provider also assumes fraud and chargeback risk responsibility.
• Higher conversion rates: If shoppers pay in cash or are using a high-interest credit card, many will choose to abandon the expensive item they want. BNPL frees those shoppers from bearing the total cost upfront. High conversion rates also come from undecided shoppers. Many aren’t sure if they love the product enough to make the initial investment. By not having to pay the total sum upfront, they feel free to order and try it.
• Expanded customer base: Through BNPL, retailers can attract customers who perhaps couldn't afford to shop with them before or didn't know about them at all. When retailers partner with BNPL providers, they have access to a network of millions of new potential customers.
• Repeat purchasers: According to Affirm, retailers that partner with the company see a 20 percent repeat purchase rate. In addition, McKinsey found that seasoned BNPL consumers use the service 15 to 20 times per year and log into the apps 10 to 15 times per month. That's a golden standard.
• Get more high-priced purchases: BNPL providers are most well-known for split pay services, which charge zero interest, zero late fees (generally), and give customers six weeks to a year to pay for an item. This service is most popular with items hovering up to $250. BNPL providers also offer installment plans, giving customers up to three years to pay for an item while charging zero to 30 percent interest. These plans inspire more higher-priced purchases.

How BNPL Affects Retail Returns

Nearly half of surveyed consumers spend up to 40 percent more online with a BNPL plan than they would if they were using another payment method. However, with more sales also comes more opportunities for product returns.

The pressure to process increasing returns volume will only mount as the 2021 holiday season approaches. In a recent survey, 81 percent of shoppers said they did more than half their holiday shopping online last year, and historically, online purchases have yielded at least three times as many returns as in-store purchases.

Fortunately, BNPL providers handle the financial aspect of collecting payment and issuing refunds, but retailers still must manage the reverse supply chain and resale strategy.

How Retailers Can Prepare

Retailers must reimagine returns as an opportunity to reduce unnecessary touchpoints, waste and overhead while recovering more lost profits. In addition to reverse logistics considerations, retailers will need to reconsider how to manage in-store and curbside returns for BNPL customers. The fact is, consumers love shopping online, but they don't always enjoy the online return experience. In 2021, 68 percent of shoppers said they favored the convenience of in-store or curbside returns over shipping items back, when given the option to do so.

In addition to convenient drop-offs, customers also want instant refunds. However, BNPL purchases won't work that way because retailers don't manage the payment or the refund directly. To keep customers happy and loyal, retailers need to create a process that allows in-store drop-offs while educating consumers about how to request prompt refunds through the third-party provider.

Retailers that cover these bases will see significant financial rewards.

David Malka is the chief sales officer at goTRG, the world's first turnkey reverse logistics company that specializes in recovering lost profits from returns and distressed inventory while eliminating inefficiencies and contributing to a more sustainable planet.