Buy Now, Pay Later (BNPL) offers customers the flexibility to spread payments over time, promising affordability without immediate financial strain.
For merchants, the promise is equally enticing—reduced cart abandonment, access to younger demographics, and a significant boost in sales. In fact, adoption rates among Gen Z, a key demographic driving BNPL growth, are projected to rise from 36.8% in 2021 to 47.4% by 2025.
But beneath this surge in popularity, the hidden costs, regulatory challenges, and operational trade-offs of BNPL often remain in the background until they hit the bottom line.
Is BNPL a catalyst for sustainable growth, a financial pitfall, or a nuanced combination of both?
Let’s get this right.
What Makes BNPL So Popular?
The rise of Buy Now, Pay Later (BNPL) is driven by clear advantages that align with modern consumer behavior and merchant needs. Its appeal is in bridging financial flexibility for shoppers with sales opportunities for businesses.
BNPL has become a cornerstone of contemporary commerce due to;
Higher Sales and Conversion Rates
BNPL has a proven track record of boosting sales by making purchases feel more attainable. According to a report by Affirm, merchants offering its BNPL options see over 85% increase in average order value.
Stripe also reported that its users that provide BNPL options in their check out processes have seen 27% in their overall sales volume. These numbers highlight how BNPL can transform checkout into a more compelling experience for buyers.
Tapping into New Customer Segments
For younger shoppers, such as Millennials and Gen Z, BNPL offers an attractive alternative to traditional credit cards. A significant percentage of these demographics avoid credit cards due to concerns about high interest rates and fees.
Merchants can appeal to these tech-savvy, financially conscious groups and gain access to a broader audience of digital-first consumers by embracing BNPL.
Instant Payments for Businesses
Despite allowing customers to pay over time, BNPL providers pay merchants upfront, covering the full transaction amount (minus their fees). This shifts the financial risk to the BNPL provider while ensuring businesses maintain healthy cash flow—an essential factor for operational stability.
Growing Consumer Adoption
In 2023, BNPL transactions accounted for $75 billion in global online spending, up 14.3% from 2022. This surge indicates a shift in consumer preferences, with more shoppers opting for BNPL to manage their purchases without immediate financial strain.
Behavioral Impact
BNPL reduces the psychological friction that often deters shoppers from completing a sale by breaking down large purchases into smaller, manageable payments. This tactic leverages behavioral psychology to drive impulse purchases, making consumers feel more comfortable with larger spending decisions.
While these benefits paint an attractive picture, they are only one side of the coin.
The Hidden Cost Of Buy Now Pay Later (BNPL)
BNPL’s appeal is undeniable, but its benefits come with significant trade-offs that merchants cannot afford to overlook.
While offering customers the convenience of deferred payments can boost sales, the hidden costs often erode the perceived gains.
High Transaction Fees
BNPL providers charge fees between 1.5% and 7% per transaction, far exceeding the typical 1% to 3% charged by credit card companies. For merchants operating on tight margins, these fees can cut deeply into profitability.
For instance, on $10,000 in BNPL sales, fees at a 5% rate would cost $500 which is an expense compared to traditional payment options.
Increased Returns and Disputes
Flexible payment options can lead to impulsive purchasing behavior, resulting in higher return rates. According to the CFPB, 13% of BNPL purchases are returned or disputed. Every return reduces revenue and introduces logistical challenges, such as restocking costs and additional labor.
Customer Experience Risks
When a BNPL provider mishandles a dispute or fails to deliver a seamless experience, it is often the merchant’s reputation that suffers.
Customers typically associate their frustrations with the business they purchased from, not the payment platform, creating a risk of long-term damage to brand loyalty.
Regulatory and Compliance Complexities
BNPL is increasingly drawing scrutiny from regulators. The CFPB’s classification of BNPL providers as credit card issuers means these platforms must comply with consumer protection rules, which can indirectly impact merchants.
Businesses may face additional legal or operational burdens as regulations evolve, including data-sharing agreements and compliance monitoring.
Operational Challenges
Higher return rates and increased volume from BNPL sales can strain merchant operations. Businesses need robust systems to manage returns efficiently and ensure disputes are resolved quickly. Failure to do so can lead to operational bottlenecks and customer dissatisfaction.
BNPL’s hidden costs can quietly erode the profitability it promises, leaving merchants with lower-than-expected returns.
Should You Integrate BNPL into Your Business?
Integrating BNPL into your business includes higher sales and also understanding the trade-offs that exist beneath the surface. The decision-making process revolves around one critical question: Does BNPL drive enough incremental value to justify its costs?
To answer this, you must assess incremental profitability, not just incremental revenue. Increased sales volumes mean little if they fail to translate into sustained, long-term growth. This evaluation requires a granular approach:
Incremental Sales vs. Fee Absorption
Start by calculating how much additional revenue you need to generate for BNPL fees to pay off.
For instance, if your average profit margin is 20% and BNPL fees are 5%, your incremental sales must grow by at least 25% just to break even. Anything below that makes BNPL a cost center rather than a revenue driver.
Customer Retention as a Measure of BNPL Success
An important, yet often overlooked metric is whether BNPL contributes to repeat business. While it may attract new customers or close an immediate sale, its role in fostering customer loyalty is less certain. To truly gauge BNPL’s value, monitor whether:
- First-time BNPL users return to purchase without BNPL.
- The average lifetime value (LTV) of BNPL customers aligns with or surpasses traditional payment users.
If BNPL primarily drives one-time purchases rather than cultivating long-term relationships, its financial benefit diminishes over time.
Return Mitigation Strategies
We’ve already established that BNPL purchases carry higher return rates (13% on average). The strategic question isn’t whether returns will occur because they will, but whether your infrastructure can absorb and reduce their impact. Implement these tactics to limit financial and operational strain:
- Enhanced product descriptions: Reduce mismatched expectations.
- Tiered return policies: Tie return conditions to customer payment completion milestones, discouraging casual returns.
- Return-specific logistics channels: Optimize reverse logistics to reduce processing costs and speed up resale readiness.
These strategies directly impact BNPL’s cost-benefit equation by addressing its most significant downside: revenue erosion through returns.
Competitive Positioning with BNPL
Adopting BNPL also involves staying relevant in your market. If competitors offer BNPL, not having it may place your business at a disadvantage. However, differentiation lies in execution, not mere availability:
- Are your competitors leveraging BNPL to push premium products or upsell effectively?
- Can you combine BNPL with loyalty incentives to amplify its value proposition, such as offering discounts for BNPL customers who transition to traditional payment methods on repeat purchases?
Competing on BNPL isn’t about copying. You need to improve its strategic role within your broader payment ecosystem
Cash Flow Considerations
One of BNPL’s selling points is immediate payouts to merchants. However, merchants often fail to account for hidden cash flow risks, such as:
- Chargebacks on disputed returns: Even when the BNPL provider handles collections, unresolved disputes can lead to clawbacks.
- Fee stacking: Certain providers charge not just transaction fees but also additional processing or settlement fees for specific cases, especially on international sales.
Assessing these risks requires combing through provider contracts carefully to ensure your understanding of payout timelines and associated costs.
Future-Proofing Your Payment Strategy
The payments landscape is evolving, and BNPL is only one facet of a larger shift toward greater flexibility at checkout. Whether BNPL remains a competitive edge in five years depends on:
- Regulatory changes: Ongoing scrutiny by bodies like the CFPB could affect BNPL’s cost structure, compliance burden, or customer appeal.
- Technological integrations: Emerging models such as embedded financing may supplant standalone BNPL platforms, offering similar benefits with fewer downsides.
Investing in BNPL today should align with your long-term strategy for customer experience, compliance, and scalability, not just short-term sales bumps.
Beyond the financial math, BNPL affects how customers perceive your brand. Balancing accessibility with sustainable profitability is critical:
- Are the benefits of higher sales and wider reach sustainable after accounting for costs and return risks?
- Does your BNPL partnership enhance customer satisfaction, or does it introduce frustrations (e.g., dispute resolution delays)?
- Can you differentiate your BNPL offering to align with your unique value proposition while minimizing risk?
With increased sales and wider market appeal on one side and higher fees and return risks on the other, your decision should be based on clear, actionable insights.
But you don’t have to navigate this alone. At VeriFee, we specialize in payment systems and can provide the clarity you need to make informed decisions.
Here’s how we can help you master the BNPL decision:
- Transparent Cost Analysis: We’ll reveal the true costs of BNPL integration, including transaction fees, hidden charges, and their operational impact on your margins.
- Fee Negotiation: Leveraging our expertise, we can negotiate better terms with BNPL providers, just as we’ve successfully reduced hidden credit card fees for our clients.
- Customer Insights: By analyzing your transaction data, we’ll identify whether BNPL aligns with your audience’s purchasing behaviors and business goals.
With VeriFee’s guidance, you’ll have the tools to assess BNPL’s potential while safeguarding profitability.
How to Calculate the True Cost vs. Value of BNPL for Your Business
Deciding whether BNPL is right for your business means moving beyond assumptions and using data to measure its true impact.
While BNPL offers a potential sales boost, it comes with costs that could erode profitability.
To assess whether BNPL will deliver value, you need a clear, structured approach to calculating its financial impact. Here’s how to break it down:
Step 1: Define Key Variables
Before calculating, gather the following data specific to your business:
- Baseline revenue: Your current monthly or annual revenue without BNPL.
- Expected sales increase: The percentage growth in sales you anticipate from BNPL
- Profit margin: Your average profit as a percentage of revenue after covering costs.
- BNPL fees: The percentage fee charged by the BNPL provider (typically 1.5%–7% per transaction).
- Return rate: The percentage of BNPL transactions likely to result in returns or disputes (the CFPB notes a baseline of 13%).
- Cost of returns: The financial impact of each return, including restocking, shipping, and handling costs.
Step 2: The Equation
Here’s the formula to calculate your net financial benefit (or loss) when implementing BNPL:
Step 3: Plug in the Numbers
Let’s break it down with an example:
- Baseline revenue: $100,000
- Incremental sales increase: 27%
- Profit margin: 20%
- BNPL fees: 5%
- Return rate: 13%
1. Calculate new sales revenue
2. Calculate profit from new sales
3. Subtract BNPL fees
4. Account for returns impact
5. Calculate net benefit
Step 4: Interpret the Results
In this example, the business sees a modest $5,842 net gain after accounting for BNPL costs and return risks. While that’s a positive number, it underscores how much of the added revenue gets eaten up by BNPL fees and returns.
Incremental sales growth must justify the operational and financial risks posed by BNPL. If the margin is slim or doesn’t outweigh other investments, BNPL may not be worth adopting.
Step 5: Test and Adjust
Every business is unique, so it’s critical to test these calculations with your actual numbers and specific circumstances:
Low margins? Small profit margins make absorbing BNPL fees more challenging.
High return rates? Adjust your estimates if your industry experiences higher return rates.
High ticket items? BNPL works well for expensive products where splitting payments makes purchases more accessible to customers.
Conclusion
Adding BNPL to your payment options can undoubtedly drive higher sales and attract new customers. However, the increased fees and return risks mean that success isn’t guaranteed.
To ensure BNPL is the right fit, take the time to crunch the numbers, analyze your customer base, and evaluate its long-term impact on your bottom line.
If the math doesn’t add up, Let VeriFee help you take control. With our expertise in payment systems, we help you uncover the true costs, negotiate better terms, and make data-driven decisions. Whether it’s optimizing BNPL or exploring alternative strategies, we’re here to empower your business. Contact us today.
