buy now pay later auf dem Handy

Buy Now Pay Later (BNPL) – The Hidden Costs and Risks of Doing Things In-House

Buy Now Pay Later (BNPL) has become an essential component of an outstanding checkout experience but e-tailers struggle with the choice between flexibility and independence of an in-house solution versus the convenience and security of a third-party service. What solution has the highest impact on the bottom line? And is this really just a binary choice?

Buyers are becoming more cautious with online purchases. And this means that e-tailers need to focus on converting as much traffic as possible into loyal customers.

While customer acquisition costs go up and consumption as a whole decreases, merchants are now focusing on a great, highly personalized customer experience to facilitate first-time purchases while putting a lot more emphasis on repeat purchases and customer retention.

Personalizing the buyer experience means meeting the individual needs of different customer segments through excellent customer journey management at every stage, from discovery to purchase, delivery, and after sales services.

Most retailers also know that a great checkout experience is vital to incentivize first-time purchases, reduce cart abandonment rate, and guarantee an overall outstanding shopping experience.

That’s why online stores offer their customers the freedom to choose their favorite payment method at checkout: the option which is perceived as less risky and more convenient by each customer.

BNPL Solutions: Advantages and Constraints

Currently, the payment methods that everyone is trying to offer due to their popularity and positive impact on revenue include invoice payments, direct debt, and instalments through a BNPL solution.

Merchants who want to offer their customers the ability to pay whenever they want using the payment method they prefer experience an increase in sales which derives from a higher conversion rate, increased average basket size, and a loyal clientele who keeps coming back for more purchases.

When merchants introduce BNPL at checkout they are well aware of the risks connected to collaborating with a third-party provider:

  • Lack of flexibility (as most BNPL providers simply offer a cookie-cutter solution to all merchants)
  • Lack of transparency and control
  • Potential issues connected to the reputability of the provider or suboptimal Standard Operating Procedures (SOPs) which could reflect poorly on the image of the merchant themselves
  • Loss of business due to the business model of certain BNPL providers whose revenue partially derive from referral deals with other e-tailers
  • Increased costs due to additional transaction fees
  • Impact on conversion rate linked to a potentially negative brand perception of the BNPL partner

To circumvent these issues, some merchants take things into their own hands and consider providing an in-house solution to meet customers’ expectations at checkout.

But what are the implications?

In-House BNPL Solutions: Do they Make Sense?

Creating an own BNPL solution certainly presents a lot of advantages when it comes to flexibility as the solution can be completely customized to fit the store’s requirements, needs, and look and feel.

Additionally, all transactions are managed internally without the risk of losing business to competitors (through referral deals offered by a third-party provider), incurring reputational risk through bad practices, or losing control and money with each transaction.

But there are a series of issues and obstacles connected to vertical integration of BNPL processes.

Mann frustriert über die Nachteile einer in-house Lösung

Impact on Resources and Fraud Risk

The first issue is connected to capabilities and costs. BNPL services involve specific processes aimed at managing risk effectively. Responsible BNPL companies work with state-of-the-art fraud detection technology, top risk management experts, and external business partners to minimize the risk of default for payments while also maximizing acceptance rate (avoiding false negatives.)

This is the reason why respectable BNPL companies have large risk management units, constantly look for the best partners when it comes to data and information and invest a substantial portion of their revenue into R&D to keep improving accuracy.

Additionally, BNLP providers can cross-reference and leverage thousands of data points across different stores to gauge the risk of each transaction whereas e-commerce providers who opt for an in-house solution can only use available data collected through their own platform.

The BNPL sector is associated with high overhead costs linked to complex operations and expertise.

Working on it in house means tying up a lot of engineering, admin, and product resources (who could work on platform innovation instead) and introducing a series of new competences which are usually outside of the scope of the capabilities connected to the core business.

Performance and Results

BNPL companies are specialized in managing financial transactions and will usually outperform vertical integration both in terms of performance and customer experience since when you treat payment methods as separate products you can invest a lot in testing, optimizing processes, and tracking the right metrics for best results.

There’s a reason why it takes a whole company to manage such complicated financial transactions!

Financial Performance

Dependable BNPL solutions offer a 100% payout guarantee to their partner merchants. They generate additional profit through increased customer value while handling all the risk connected to it.

Competent BNPL providers have more leverage when it comes to negotiating deals with pre-financing and refinancing partners. And they have the expertise to select the best options to optimize the business model while reducing risk at each step along the value chain.

Without proper security measures, custom payment solutions can be vulnerable to fraud and hacking, leading to financial losses and damage to the merchant’s reputation.

Compliance and Regulatory Risks

Respectable BNPL providers are highly regulated financial service providers (not simple fintech solutions) and keep up with regulatory and compliance issues on a daily basis through industry updates, relationships with regulatory institutions (like Bafin), and consulting.

Data privacy regulations and security standards constantly evolve and the risk of incurring penalties or losing customer trust is extremely high. That’s why BNPL solutions have dedicated units who work around the clock on topics connected to compliance.

Technical Risks

Tying up technical resources to maintain a BNPL apparatus is linked to overhead and opportunity costs.

BNPL technology needs to be bullet-proof as disruptions in the payment processes or system failures have immediate repercussions that lead lost revenue.

State-of-the-art infrastructure is required to guarantee uptime and smooth processes. It’s quite costly for companies to maintain such an infrastructure as this becomes a fixed cost that can’t be diluted across different operations.

And especially now in the current economic climate dominated by uncertainty, mounting fixed costs can seriously damage liquidity and financial performance.

Additional Financial Risks

Offering instalments or payment via invoice without the help of a third-party provider can result in financial risk for the merchant, as they have to front the cost of the purchase until the customer pays the instalments. This reduces cashflow efficiency while generating additional opportunity costs.

On top of that, the vertical integration of such a complex function is linked to extremely high sunk costs. There might be some form of Return on Investment in the long run but saving a small margin in terms of transaction fee is heavily outweighed by the initial investment, the allocation of additional resources, opportunity costs, risks, and maintenance costs.

It is virtually impossible to break even on such investment as BNPL providers are a lot more efficient in their cost structure due to specialization, the scale of their operations, and the relationships they establish with suppliers and other business partners.

Vertical integration converts variable costs (transaction fees) into fixed costs (infrastructure and resources) and is therefore linked to incredibly high financial risks.

What E-Tailers Can Do to Bypass the Issues Connected to BNPL Integration

On the one hand, dealing with conventional BNPL solutions presents some serious shortcomings, but vertical integration is linked to hidden costs, risks, and inefficiencies.

So, are e-tailers simply caught between a rock and a hard place? Not really.

There’s a third option that addresses all the issues introduced by working with a third-party BNPL provider and vertical integration: white label applications.

A white label BNPL provider like Ratepay helps companies avoid all the risks and costs connected to in-house development while eliminating all the problems connected to branded BNPL solutions by directly offering its services as a native integration within the merchant’s platform without forcing buyers to interact with a third-party application.

The merchant profits from outsourcing the service, but they have full control of the transactions that happen directly within their platform as if the integration were built in-house.

A white label solution is completely invisible and guarantees maximum flexibility while not directing customers to other services or interacting with buyers in any way trying to direct them to other stores.

This leads to a higher conversion rate at checkout, more revenue, fewer costs compared to an in-house solution, and a stress-free and risk-free checkout process for both customers and merchants.

Basically, a white label solution like Ratepay combines the best of the two worlds:

  • Security
  • Stability
  • Low variable costs
  • Great customer experience
  • Higher conversion rate
  • Increased customer retention rate

Learn more about the advantages of working with a white label BNPL partner and on the functionality of such solutions by downloading our latest white paper.