Risks for merchants in cross-border BNPL transactions

Buy Now, Pay Later (BNPL) continues to proliferate in markets around the world, providing compelling new opportunities for merchants, issuers, card networks, and consumers with limited access to traditional credit. As financial service companies have stepped in, they transformed the debt landscape by normalising BNPL across the globe, resulting in a wave of adoption among merchants.

Short-term instalment loans provide intriguing opportunities at every level of the payments ecosystem, but as with most financial opportunities, there is risk. Merchants, especially those that operate across borders and in multiple currencies, need to consider those risks before investing in the infrastructure necessary to support BNPL payment options.

The risk of default

With this payment method, a consumer pays an initial instalment to receive a product, then continues paying instalments weekly or monthly over an allotted time (often three or six months) until the balance is paid in full. There may be interest or late fees, though many BNPL contracts avoid fees entirely.

BNPL does not operate as traditional credit, even though most providers are using the processing rails provided by the card schemes to facilitate these loans. Instead, it’s a short-term financing contract that is not yet regulated to the same degree as traditional credit offerings.

There are distinct advantages to this lower regulatory threshold, including high approval rates for customers and flexibility in contracts and agreements. The downside, however, is that higher approval rates with fewer standards mean a higher potential risk for default. If a consumer passes the soft inquiry for approval, pays the first instalment, receives the product or service, and then disappears, where does that leave the merchant?

Default risk is not unique to BNPL, of course, there’s risk in traditional credit transactions as well. However, with a stricter approval process and a significantly more complex regulatory infrastructure, merchants and solution providers have developed a wide set of tools designed to minimise defaults and aid in asset recovery. These same resources may not be available for BNPL transactions.

The global economy is constantly expanding and contracting, and recession is always an unfortunate possibility. If your market is hit particularly hard and your customers are unable to honour the terms of your BNPL agreement, the lack of support structure provided by traditional payments and credit avenues could prove to be a significant liability, especially for smaller merchants. 

Many BNPL providers account for this eventuality, and many offer solutions to mitigate this risk. Those solutions will vary by provider, so working with a knowledgeable partner on strategy and implementation is critical. 

Currency exchange rates and BNPL 

One of the most significant concerns for global merchants utilising BNPL is represented by currency exchange rates. When compared to traditional credit, these point-of-sale instalment loans have no built-in contingency for absorbing fluctuating currency values. BNPL can potentially expose merchants to the risk of foreign exchange markets when engaged in cross-border transactions. 

For example, a merchant engages in a cross-border BNPL transaction with a different currency. Three months pass, and when the final instalment is due, that currency is worth less than it was when the agreement was initiated. Which party absorbs that cost? Similarly, if the item purchased is now worth more than the consumer paid due to currency exchange fluctuations and the customer returns that item, is the merchant liable for that additional cost as well? 

When considering the high transaction volumes of larger global merchants, it’s clear how these small discrepancies might quickly become problematic at scale. 

It’s likely the advantages of thoughtful BNPL implementation can offset this risk, even at larger transaction volumes. A qualified BNPL partner should be able to provide additional insight into this topic.

The future is wide open 

As with all payment methods, there is going to be a period of learning and adjusting to consumer patterns. The concerns mentioned above should be on a short checklist for consideration so that both merchants and consumers can continue to benefit from this flexible payment solution. 

Learning the fundamentals of BNPL is an important first step in navigating this new frontier. Merchants need to have the baseline knowledge necessary to productively engage with potential BNPL partners, and educational resources that provide a foundational understanding are an excellent place to begin that process. 

As global regulators consider how to respond to the unique characteristics of BNPL, the regulatory landscape will undoubtedly continue to develop. As it does, new tools will likely be created to mitigate the risks outlined here, and the future of BNPL will come into clearer focus. 

The continued adoption of BNPL is clear evidence that it is a viable, profitable, and mutually beneficial payment option when correctly implemented. It is up to merchants to limit exposure to the risks while ensuring they benefit from the significant upsides.

This editorial was first published in our Cross-Border Payments and Ecommerce Report 2021–2022, which taps into the fast-growing cross-border market and provides a comprehensive overview of trends and developments that are pivotal in this space, being the ultimate source of information for ecommerce businesses interested in expanding globally.

About Julie Fergerson

Julie Fergerson, CEO of the Merchant Risk Council, has 25+ years of experience developing, delivering, and promoting Internet-based technologies. She has a proven track record of bringing key stakeholders together to solve difficult problems and positioning existing technology to meet the needs of an audience without changing the fundamental value of that technology.

About Leo Parrill

Leo Parrill has extensive experience with content marketing and copywriting in the payments, technology, and gaming industries. He has a proven track record of creating and managing digital content with some of the largest technology companies in the world. He is proud to currently be producing and guiding the Merchant Risk Council’s extensive content offerings.

About MRC

The MRC is a global community connecting ecommerce fraud prevention and payments professionals through educational programmes, online community groups, conferences, and networking events. The MRC is a non-profit organisation headquartered in Seattle, Washington, but embraces members from across the globe.