Buy Now Pay Later (BNPL) is becoming a prominent payment option, notably on e-commerce platforms. This transformative fintech-enabled payment option offers customers an alternative to the traditional instant prepaid payment methods, allowing them to make purchases of goods and services, however, spreading the repayments over time.
Nonetheless, the convenience of this deferred payment option comes with inherent risks. The potential vulnerabilities in its operational processes and general transactional risks posed to transactional stakeholders, especially merchants and BNPL service providers cannot be ignored in its general adoption as an innovative consumer goods payment method.
Therefore, this article seeks to provide an overview of the BNPL concept, its benefits for various transactional stakeholders, and the potential challenges and risks that may arise from its use, as well as some recommendations to mitigate them and promote its adoption across Africa.
THE CONCEPT OF “BNPL”
BNPL is not an entirely new concept. It is an evolution of the traditional instalment payment plan which dates to the 19th century. Its root is traceable to the trade credit regime, a traditional form of business-to-business (B2B) financing between a supplier and a buyer, where the supplier extends credit to the buyer and allows the latter to pay for the goods or services later. The innovation in BNPL, is the extension of the credit regime to cover both business-to-customer (B2C) and B2B financing models with structured payment plans, usually managed by a third party, the BNPL service provider.
Broadly speaking, the growing dominance of BNPL has been facilitated by the emergence of fintech service providers that leverage digital technologies to offer fast, convenient, and flexible payment solutions, typically without applying interest charges if pre-finance amounts are paid within the specified period by the customer. Over time, BNPL services are being integrated into online and offline retail platforms to offer customers a seamless checkout experience.
The exponential growth of e-commerce and online shopping is one of the primary catalysts behind the rise of BNPL. As customers increasingly seek convenience and flexibility in financing their purchases, there is a growing demand for alternative payment methods that can enhance conversion rates, increase transaction values, and foster customer loyalty. BNPL has emerged strongly as a viable solution, offering customers the flexibility to defer payments while enjoying immediate access to products or services.
Further, access to vast amounts of data and data analytics technology is enabling fintech service providers to assess the creditworthiness of customers in real-time, and provide them with tailored personalized offers based on individual preferences and shopping behavior. This data-driven approach is not only enhancing customer experience but also helping mitigate risks for merchants, fostering trust and reliability in transactions.
Additionally, the increased adoption of mobile devices and customer-friendly applications has further accelerated the adoption of BNPL services. With smartphones becoming indispensable tools in our daily lives, customers are able to easily access and utilize BNPL services anytime and anywhere.
Further, innovations in payment infrastructure coupled with regulatory advancements have facilitated the seamless integration of BNPL services into merchant platforms ensuring secure and compliant transactions and helping building trust among customers and merchants.
BENEFITS OF BNPL
The widespread adoption of BNPL has been attributed to the compelling value proposition and profitability this payment model offers to all key transactional stakeholders – the customer, merchant, and BNPL service provider. The following are some benefits that BNPL offers to these transactional stakeholders:
- Customers: BNPL represents a means to access affordable credit without the constraints typically associated with traditional credit cards or overdraft facilities. By eliminating the need for an upfront payment and allowing the spread of purchases over time, BNPL empowers customers to manage their finances more effectively, thus avoiding the burden of interest charges or late fees. This not only enhances financial flexibility but also promotes responsible spending habits. Furthermore, BNPL enhances the overall customer experience by offering convenience, flexibility, and transparency throughout the payment process, thereby fostering loyalty among customers.
- Merchants – ordinarily, merchants present numerous opportunities to drive sales and revenue growth. Integrating BNPL as a payment option allows merchants to reach a wider customer base, particularly appealing to younger demographics and the underbanked, who prefer its flexibility and convenience. It also enhances customer retention and boosts customer loyalty by enabling merchants to offer incentives, such as discounts and rewards. In addition, it reduces the risk of chargebacks and fraud by shifting these liabilities to the BNPL service provider, thus offering merchants added security.
- Service Providers: The model offers an avenue for revenue growth and business expansion. BNPL service providers generate income by charging fees for missed or late payments from customers and earning interest in long-term plans, thereby providing valuable financial services. Service providers can also leverage the increasing popularity of the model to forge mutually beneficial partnerships in the retail industry. Similarly, service providers gain valuable insights from the data collected from both customers and merchants, enabling them to improve their services, personalize customer experiences, and drive innovation in the payment industry.
SOME ASSOCIATED RISKS AND RECOMMENDATIONS
Undoubtedly, BNPL is a fast-growing and innovative payment option that offers many benefits to transactional stakeholders. However, it also comes with some operational and transactional risks that need to be addressed to ensure the security of transactions, especially as they relate to the protection of customers and the sustenance of the underlying business operations. The different risks associated with the adoption of the model and the recommended solutions for secured transactions are discussed below.
- OPERATIONAL RISKS
- Fraud Risks:
Fraud remains a significant concern in BNPL transactions because of the decentralized nature of these platforms and the lack of stringent authentication measures. Fraudsters may exploit vulnerabilities in the system through identity theft, account takeovers, and false purchases to undermine the BNPL innovation. One common occurrence may be using stolen identities to make purchases, leaving merchants and BNPL service providers exposed to financial losses.
A key strategy for safeguarding BNPL transactions lies in proactively preventing fraud and obtaining real-time transaction data. One way of achieving this is the adoption of multifactor authentication (MFA) protocols which adds an extra layer of security by requiring users to provide multiple forms of verification, such as passwords, biometrics, or one-time codes. Customers should also use strong passwords, antivirus software, and secure devices to protect their accounts and information from being hacked or exposed by fraudsters.
- Cybersecurity Vulnerability
BNPL platforms have the potential to store vast amounts of sensitive customer data including personal and financial information. This makes them attractive targets for cybercriminals seeking to exploit their security weaknesses. Cyberattacks such as malware infiltration, phishing schemes, and data breaches pose serious threats to both customers, merchants, and service providers. A breach in any security protocol along the value chain may not only compromise customer trust but also expose individuals to potential financial losses and identity theft.
To improve cybersecurity defenses, BNPL service providers must prioritize data encryption and privacy measures. Additionally, the adoption of end-to-end encryption technologies will help ensure that sensitive information remains secure throughout the transaction process, thereby preventing unauthorized access by third parties. Also, adopting stringent privacy policies and compliance with regulatory standards, such as Data Protection legislation and PCI DSS, can help safeguard customer data against potential breaches and unauthorized usage.
- TRANSACTIONAL RISKS
- Default in Payment and Delivery.
Under this category of risk, BNPL is faced with two main challenges. One is the risk of customers not paying their installments on time and the other is the need for prompt product delivery. By using BNPL to make purchases, a customer inherently is agreeing to pay the upfront cost of the purchased item over time. However, there is a likelihood that some consumers might not keep up with their repayment commitments, defaulting and creating financial losses for both the BNPL service provider and merchants.
Equally, the delivery of purchased items ultimately to the consumer, particularly at a later date will have inherent risks. Any delay in delivery or issues with product quality can lead to complaints and chargebacks, thereby increasing the risk of damaging the merchant’s reputation. In BNPL transactions, customers may take possession of purchased goods upon delivery; however, ownership may remain with the merchant until the final installment payment is made. This dual status of possession and ownership complicates the legal relationship between parties and raises questions about liability and risk allocation.
It is recommended that merchants and service providers adopt and/or use an escrow account to securely hold funds until customers fulfill their payment obligations. This reduces the risk of default and ensures merchants receive payment for goods or services provided. Moreover, funds can be released to merchants in installments as customers make payments, to help deal with inflation and “time value of money” related issues. Additionally, escrow accounts can verify product delivery before releasing funds to merchants, incentivizing timely and accurate delivery and enhancing customer satisfaction.
In dealing with the legal issues of possession and transfer of ownership in the purchased goods, the execution of tailored contracts consistent with local laws on sales of goods particularly credit sales or hire purchases will help deal with the associated risks.
- Interest Payment:
BNPL services allow customers to make purchases and spread costs over time through instalment payments, typically without incurring interest charges if the balance is paid within the specified period. This interest-free model is a key selling point for BNPL service providers and is attractive to customers seeking flexible payment options. However, non-payment of interest presents challenges for merchants accepting to offer customers their cash/current selling prices as BNPL prices, which will have to be paid over a period of time without interest.
When customers repay the due amount within the interest-free period, merchants will not be entitled to any additional income which may pose operational risks to their profitability agenda. The absence of interest charges may incentivize customers to take on more debt than they can afford, leading to an increased risk of default. If customers are unable to make timely payments or default on their installment plans, although the merchant will be entitled to interest, the recovery of the due amount plus interest is not guaranteed due to the existing high consumer loan default rates.
A recommendation is to implement robust risk management practices to assess the creditworthiness of customers and mitigate the risk of default. This may include conducting thorough credit checks using credit scoring models, setting appropriate credit limits, and monitoring payment behavior. Also, BNPL service providers and merchants must work out prices that reflect the true value of the purchased items over time to keep the merchants motivated and participating in this payment option.
- Price Fluctuations:
For merchants, price fluctuations can directly affect revenue and profitability. If the price of the purchased product goes up before the final instalment payment is made, merchants will incur losses. This is particularly problematic in industries with volatile pricing dynamics, such as electronics or fashion, where product prices can fluctuate rapidly due to market trends, seasonality, or external factors.
A recommendation is to utilize dynamic pricing strategies that adjust product prices in real time based on market demand, inventory levels, and other relevant factors and provide these price updates to consumers in a transparent manner. This will allow merchants to adapt to price fluctuations and maintain profitability. Implementing risk management techniques, such as hedging or forward contracts, may mitigate the impact of price fluctuations on inventory costs as well as help merchants preserve or maintain their profit margins and hedge against potential price increases or reductions.
CONCLUSION
As the Buy Now, Pay Later (BNPL) landscape evolves, it is crucial for stakeholders to stay alert and flexible in the face of emerging risks and challenges. By prioritizing and implementing recommended strategies, the BNPL ecosystem can fully harness its potential while safeguarding consumers, merchants, service providers, and the overall integrity of the financial system.
ABOUT THE AUTHOR
CECILIA ANTWI KYEM is a lawyer with expertise in Technology and Emerging Innovations. She welcomes views on this article via kyemcecilia@gmail.com.