chargeback management solutions in north america

Why Buy-Now-Pay-Later Is a Boon and a Bust In the Fight Against Chargebacks

Despite rising inflation, consumers are charging ahead with their spending. With online lenders eager to offer personal loans and buy-now-pay-later (BNPL) schemes now a mainstay of eCommerce transactions, shopping has never been easier. Consumer spending fuels the economy, which is a good thing, but excess spending also exacerbates the challenges merchants face with chargebacks and friendly fraud.

Read on to understand the link between rising inflation and the latest consumer spending trends. Find out why convenient financing schemes like BNPL influence these trends and what merchants can do to manage their ever-increasing chargeback fees.


The Current State of Play
Ecommerce merchants have faced strong headwinds since the outbreak of the COVID-19 pandemic. During lockdown, consumers took to their smartphones and desktops and ordered everything from toilet paper to dinner online. While the increase in digital payments was good for merchants, it also resulted in more chargebacks and friendly fraud.

Since COVID, customers have increasingly decided to dispute charges claiming that either they didn’t receive items, or they were not up to the quality they expected. Another common scenario for disputes is when the person paying the credit card bill is unaware of orders placed by other household members using the same card. They don’t recognize a charge on the billing statement, so they initiate a chargeback.

The chargeback problem intensified for merchants, but there was another unforeseen issue fast approaching, failing supply chains.


The Supply Chain
Merchants expected some reprieve from the spike in chargebacks when the pandemic abated. At least people were no longer having to cancel events, holidays, and business trips. However, instead, supply chains failed due to economic and political pressures, and delays in orders and the inability to source inventory created even more problems for merchants. Consumers, frustrated by slow and unresponsive service, were quick to initiate chargebacks if they could get what they needed faster from another vendor.


Inflation and the Problem with Buy-Now-Pay-Later
Compounding the supply chain woes came rising inflation. Strangely, inflation is not hampering consumers’ urge to spend because plenty of lenders are willing and able to provide convenient financing. Personal loans are two a penny from online lenders, and most ecommerce sites offer Buy-Now-Pay-Later (BNPL) schemes, which are basically installment loans offered at the point of purchase.

BNPL surged as people embraced the simplicity of check-out financing, and the business model is gaining steam. According to a new report from GlobalData, BNPL’s global transaction value reached $120 billion in 2021, and with the prospect of continued inflation and higher prices, GlobalData projects the BNPL market to increase by almost 500% to $576 billion by 2026.

This is not good news for merchants. Even though BNPL boosts sales, it exacerbates chargebacks. BNPL schemes encourage consumers to fall into debt, and for consumers with financial difficulties, filing a chargeback is considered a surefire way of getting their money back. Reflecting this consumer environment,  65% of merchants have reported an increase in friendly fraud over the past three years and 75% have taken steps to mitigate chargebacks.

It’s not a stretch to state that the combination of inflation and BNPL schemes exacerbate chargebacks. Higher prices for consumer goods, particularly high-ticket items like household appliances, have increased the use of BNPL and helped push up consumer loan balances. And the BNPL trend is endangering both consumers and merchants.

The Bureau of Consumer Finance Protection recognizes the risks of point-of-sale financing to consumers and warns against it stating, “The Bureau encourages all providers in this space to take steps to make sure users of these products are adequately informed of the risks of such products.”

The Guardian newspaper goes so far as to call BNPL schemes debt traps. According to Guardian research, almost a third of shoppers who use BNPL credit are struggling with the repayments claiming that paying back the loans has become “unmanageable” because of the constant rise in the cost of living. 

If consumers are saddled with unmanageable debt, disputed charges on credit cards and instances of friendly fraud are bound to increase as they try to gain back some control.

Related: “Customers Are Now the Biggest Fraud Threat to Merchants—How to Fight Friendly Fraud”


Customers are Protected, Merchants Aren’t
Customers are willing to buy and then dispute a charge because it’s an easy way to get a refund. Also, because of the way payment providers, card issuers, and the banks involved work, consumers are protected.

In its report on the effect of the pandemic on the credit card market, the Bureau of Consumer Finance Protection stated the following: “As physical stores closed and a greater share of commerce was transacted digitally, cardholders benefited from the consumer protections afforded to credit cards such as limitations on liability and enhanced security.”

If a customer contacts their card provider and claims that a charge is fraudulent, the bank is happy to investigate and charge the merchant the appropriate fees. The merchant, on the other hand, has little defense because challenging the customer will damage their reputation and customer relationships. For the merchant, it’s better just to pay the fees.


Fighting Chargebacks in Inflationary and Non-Inflationary Times
The financial relief that merchants were hoping for once the pandemic had abated never occurred, and disputes or chargebacks are a bigger problem than ever. It is a problem expected to intensify considering ongoing supply chain inadequacies, inflation, and easy access to financing like BNPL.

We’ve established that BNPL schemes are a double-edged sword—simultaneously boosting conversions and chargebacks—so what can merchants do to strike a balance between additional revenues and leakage due to chargeback fees? Here are two suggestions.


Build Stronger Customer Relationships
Building strong customer relationships is critical. Frequent contact with customers encourages them to go to the merchant first before initiating a dispute with the bank. If the merchant can resolve the issue, they avoid chargeback fees.

Some ways to improve customer relations are:

  • Send out regular emails about discounts and deals
  • Use chatbots to provide 24/7 customer service
  • Provide clear billing statements
  • Manage social media, and respond to negative online customer reviews
  • Offer no hassle returns with prepaid return labels
  • Make it easy for customers to cancel subscriptions

Great customer relations will go a long way, but they will not address the underlying causes of increasing chargebacks, which are a combination of a tough economic environment and consumer behavior. Until the tide changes, there are new innovative solutions that can protect merchants.


Use Chargeback Alerts
Two powerful solutions from Visa and Mastercard are helping merchants fight chargeback fees. Verifi and Ethoca use similar technology to alert merchants of potential disputes before the chargeback process is initiated. Merchants receive notification of a potential chargeback early in the process, which gives them an opportunity to reach out to the customer and provide a refund or otherwise resolve the issue directly, avoiding a costly chargeback fee.

If the merchant decides to refund the customer, Verifi or Ethoca will do so automatically. Visa and Mastercard charge a fee for each alert, but the cost is much lower than the cost of a potential chargeback.  

For more on chargeback management, read “9 Best Practices for Chargeback Management”


The Future for Merchants
The word of ecommerce is an evolving, turbulent one. Burgeoning chargebacks fueled by Inflation and BNPL are only the latest challenges for merchants. But by partnering with experts in the payments and fraud prevention sector, merchants can leverage top-notch technology designed to fight identified current and future threats.

Find out how easy it is to integrate chargeback management solutions, fraud protection, and early alert tools with your existing infrastructure. Partner with Cartis Payments, a provider of streamlined digital payment gateways. Focus on growing your business and leave the chargeback and threat management to the experts.