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If buy now, pay later (BNPL) becomes a preferred payment method, the service may cost more for merchants than what it brings in, the Federal Reserve Bank of Kansas has warned, adding that it is unlikely for U.S. regulators to step in to mitigate merchant costs.
In a new research briefing, the Kansas Fed discusses potential benefits and risks associated with the rapidly growing BNPL sector.
The report notes that merchants that adopt this payment method can significantly reduce their cart abandonment rate, attract new consumers and allow existing ones to purchase more expensive products.
It can give them a competitive advantage against other merchants that do not offer this method and eliminate a merchant’s chargeback and fraud risks because BNPL firms assume those risks.
However, BNPL payments may cost the merchant double the amount it would pay in case of a debit or credit card payment.
The paper estimates that the cost of a BNPL transaction for merchants ranges from 1.5 to 7 percent of the purchase value, including tax, while the cost of a typical debit or credit card transaction ranges from 1 to 3 percent.
Although BNPL may bring in new sales for merchants, in the long term, the interest-free product could become the preferred payment method for consumers at the expense of less costly methods, such as debit cards, resulting in an increase in fees over time.
However, once a merchant chooses to enable BNPL, it creates a customer expectation that could make it tough to reverse and discontinue the product, eventually leading to falling margins.
“Long-term effects could include lasting shifts in payments that result in the cost of accepting BNPL outweighing the value,” the Kansas Fed warns.
Merchants may decide to introduce a minimum transaction value for the use of the service to mitigate their costs, but fees may not decline without regulatory intervention.
Consumer adoption of BNPL has been growing rapidly in the U.S. According to Accenture, the number of users has grown by more than 300 percent per year since 2018, and now there are 45m active users in the U.S.
Spending with BNPL has also increased and now represents about 2 percent of U.S. online retail sales, according to Tighe.
Although consumer protection risks have already attracted regulatory attention, the Kansas Fed stresses that it is “uncommon” in the U.S. for regulators to step in to reduce merchants’ costs.
The U.S. is, however, not alone with its worries regarding high merchant fees. Australia, one of the world’s largest markets for BNPL, has recently amended its retail payments regulations to allow retailers to pass on their costs to customers, by preventing providers from adding surcharging rules to their BNPL schemes.
The Reserve Bank of Australia said: “BNPL services are often free or inexpensive for consumers to use if payments are made on time, but tend to be expensive for merchants to accept. Despite this, providers of BNPL services typically have ‘no-surcharge’ rules that prevent merchants from passing on these costs to the consumers who benefit from using the BNPL service.”
If merchants do have the ability to charge customers for using BNPL, depending on the level of fee, it could prevent this "lasting shift" as described by the Kansas Fed as consumers will likely be more selective in their usage. At the same time, merchants who continue to offer the service free of charge are likely to do so because they see some commercial value.
