Disadvantages of Buy Now Pay Later Financing

In the previous articles, we have already seen what Buy Now Pay Later (BNPL) financing is, how it is implemented as well as the advantages of such financing to merchants.

The common viewpoint is that corporations only benefit from implementing Buy Now Pay Later (BNPL) financing. This means that even though individuals might associate disadvantages related to Buy Now Pay Later (BNPL) financing, corporations do not.

However, this thought process is not correct. This is because there are significant downsides to Buy Now Pay Later (BNPL) for retailers which provide these options to their customers.

The details of the common issues which have been reported by retailers have been presented in the article below:

1. High Transaction Costs: The first major pain point which retailers face when it comes to Buy Now Pay Later (BNPL) financing is the fact that such financing is quite expensive! Companies which provide this type of financing claim to not charge any interest for the finance they provide.

   Now, it is impossible to not charge any interest for money being lent out. This is because there is both a risk as well as a cost associated with such money. Hence, Buy Now Pay Later (BNPL) service providers tend to recover the cost associated with such financing via transaction costs which are passed to retailers.

   For instance, if a retailer has made $100 worth of sales via Buy Now Pay Later (BNPL) financing, it is likely that they will receive only $93 from the service provider after deducting transaction costs. Since retail is already a low margin business, retailers are not able to absorb these higher transaction costs.

2. Price Inflation: Now, since we know that they are high transaction costs which retailers are not able to absorb, it is only logical that the retailers tend to pass on these costs to the customers. Hence, as far as the customers are concerned, the products they buy using Buy Now Pay Later (BNPL) financing are more expensive as compared to regular products.

   The zero-cost instalment is only a marketing gimmick which is being used to convince customers. When the prices are compared to stores which do not provide such financing, there is a clear price difference. Hence, retailers where a large percentage of users pay using credit benefit from Buy Now Pay Later (BNPL) financing. The additional price inflation caused by this financing drives away customers who plan to use cash to make the purchase.

3. Complicated Return Policy: Most retail stores have a fairly straightforward return policy. These stores often either refund the money or provide store credit to customers as long as the return the goods in an unused condition and some other basic terms and conditions are met. However, when the Buy Now Pay Later (BNPL) service provider gets involved in the transaction, it may not be possible for the retailer to offer such easy refunds. This is because there is a huge transaction cost associated with Buy Now Pay Later (BNPL) purchases.

   Hence, if the customer wants to return the product, they may have to pay some part of the transaction cost. Also, the refunds tend to become complicated since the retailer has to refund to the Buy Now Pay Later (BNPL) service provider who would then have to return the money to the end consumer. Hence, returning products purchased using this form of financing becomes quite a hassle.

4. Technological Integration Challenges: The Buy Now Pay Later (BNPL) financing option needs to be added to the point-of-sale system of the retailer. Many retailers provide multiple financing options from multiple Buy Now Pay Later (BNPL) service providers.

   The technological integration of the services being provided by the Buy Now Pay Later (BNPL) companies to the point of sales system of the retailer also becomes a task. It can be both expensive as well as difficult to implement such changes.

5. Negative Impact on Brand Image: There are many reasons why Buy Now Pay Later (BNPL) service providers are receiving a lot of flak on social media as well as on mainstream media.

   The Buy Now Pay Later (BNPL) companies are being accused of pushing people into consumer debt. This is because a lot of people who avail such loans already have a lot of credit outstanding on other sources such as credit cards or overdrafts.

   Buy Now Pay Later (BNPL) loans provide a mechanism for such people to circumvent the checks and balances in the system which prevent them from overleveraging. Also, it has come to light that Buy Now Pay Later (BNPL) companies charge a lot of fees and significantly high interest rates if any payment is missed. Hence, if a retailer is associated with any Buy Now Pay Later (BNPL) financing company, they also tend to receive a negative impact on their brand image.

6. No Competitive Edge: When the Buy Now Pay Later (BNPL) loans were introduced, they used to provide retailers with a competitive edge. However, now these loans have become all too common. It is for this reason that now they do not provide any kind of advantage to retailers. It is assumed that almost all big box retailers should have some kind of Buy Now Pay Later (BNPL) financing arrangement.

7. Privacy and Security: Last but not the least, retailers are compelled to share sensitive data related to the customers with Buy Now Pay Later (BNPL) service providers. These service providers may or may not have robust systems in place to prevent any misuse of this data. It is for this reason that customers are always at a risk of facing a privacy or security breach when they avail of Buy Now Pay Later (BNPL) financing.

It would be fair to say that Buy Now Pay Later (BNPL) financing has its fair share of disadvantages for the retailers as well. Retailers must consider these points before deciding to implement such financing in their business.