Chargebacks & Buy Now, Pay Later: What You Need to Know

Buy Now, Pay Later Explained

When purchasing a product or service, customers are often provided with several different payment options. Buy Now, Pay Later (BNPL) is an option that allows customers to purchase goods or services immediately but pay for them over a set period, often in interest-free installments. This enables customers to spread the cost of a purchase into smaller, more manageable payments at little extra cost, as long as they stick to the agreed payment schedule.

Customer – BNPL Service Provider – Merchant

When a customer selects the BNPL payment option, three key stakeholders become involved in the transaction process: the customer, the BNPL service provider, and the merchant. First, the BNPL service provider carries out a soft credit check on the customer, who then agrees to a small transaction fee and a set payment structure of installments. The service provider then immediately pays the full amount to the merchant, who pays a flat transaction fee or a percentage of the transaction amount for the service.

The Benefits to All Key Stakeholders

In this model, everyone effectively benefits: the customer receives a product or service without having to pay the full amount upfront, the merchant enhances the customer experience and increases sales, and the BNPL service provider earns both customer and merchant transaction fees. Additionally, if the customer fails to make timely payments, the service provider may seek late payment charges and, in some cases, even charge interest at this point.

The Chargeback Process

A chargeback is a reversal of a payment by a bank at a customer’s request, usually due to disputes like fraud or dissatisfaction with a product or service. Chargebacks are problematic for merchants because they lead to lost revenue, fees, and potential damage to a business’s reputation.

Rather than being a single event, a chargeback is a process of events that includes disputing a transaction, reviewing evidence, and deciding whether to reverse the chargeback or keep it. In some instances, chargebacks can be complicated, but the basic outline is detailed below:

1. The cardholder believes that a transaction made on their account is invalid and that they should not have to pay it.
2. The cardholder calls their issuing bank to dispute the transaction
3. The issuing bank decides if the claim is a valid reason to grant a chargeback. If they believe the case is not valid, the process ends there. However, in most cases, the issuer will give the cardholder the benefit of the doubt and allow the process to continue.
4. The issuing bank sends the chargeback request to the merchant’s acquirer. The acquirer will then debit the merchant’s account and notify them of any applicable chargeback fees.
5. The merchant must decide whether to accept the chargeback or fight it. 
6. If the merchant decides to fight the chargeback, they must submit a rebuttal letter along with compelling evidence to prove that the transaction was valid, and the dispute invalid.
7. The issuing bank evaluates the evidence and decides whether to accept or contest.
8. The issuer will send the evidence to the cardholder. If the cardholder does not agree, the issuer can initiate a pre-arbitration or arbitration case.
9. If the acquirer or merchant is not satisfied with the response provided, the card network steps in to decide the outcome of the case. The losing party in arbitration will be charged significant fees.

Chargebacks in BNPL

The chargeback process can be more complex with BNPL transactions than with traditional payment methods because there are more stakeholders involved. Unlike straightforward credit or debit card transactions, BNPL transactions involve the merchant, the BNPL provider, and the customer, each with their own interests. This means the chargeback process can become more complicated and take longer to resolve, as the merchant may need to coordinate with the BNPL provider to determine who bears responsibility for the chargeback.

Other potential complexities associated with chargebacks in BNPL transactions include understanding the terms and conditions of the BNPL provider and how these may impact dispute resolution. Merchants should be aware of these challenges and manage them carefully to reduce the risk of financial loss and to maintain customer satisfaction and business reputation.

The Impact of Regulation (or Lack Thereof) on BNPL Chargebacks

At the time of writing, most BNPL providers are not regulated by the Financial Conduct Authority (FCA). As a result, traditional consumer credit protections, like those for credit cards and personal loans, do not apply to BNPL transactions.

However, it’s important to note that if a customer uses a credit or debit card to make their payment, they can still raise a chargeback through their card issuer. Merchants should be prepared for these chargebacks and the negative consequences they can have on revenue and customer relationships.

Reasons for BNPL Chargebacks

There are many reasons for BNPL transaction chargebacks. Here are four of the most common:

• First-Party Fraud – A fraudster uses a stolen credit card to make a BNPL purchase. When the legitimate owner notices the payment, they initiate a chargeback.
• Friendly Fraud – A customer makes a legitimate BNPL purchase using their credit or debit card but later claims that the transaction was fraudulent or unauthorised and initiates a chargeback. This is usually due to forgetfulness or misunderstanding.
• Buyer’s Remorse – A customer makes a legitimate BNPL purchase using their credit or debit card but then feels a sense of guilt or regret and initiates a chargeback to retrieve their funds. This is usually a response to impulse buying.
• Payment Disputes – A customer makes a late payment or fails to fulfill the payment agreement with the BNPL provider. They are charged late payment fees, which provokes them to initiate a chargeback.

How to Prevent BNPL Chargebacks

There are several ways a merchant can prevent chargebacks on BNPL transactions:

• Clearly Communicate Terms & Conditions: Ensure the BNPL terms and conditions are prominently displayed at checkout, detailing payment schedules and any associated fees.
• Verify Customer Information: Use authentication tools to verify a customer’s identity to prevent fraudsters from using stolen card details. Ensure the name on the transaction matches that of the resident at the delivery and billing address.
• Keep Records: Maintain comprehensive records of all BNPL transactions, including purchase details, payment plans, and all communications with customers.
• Offer Excellent Customer Service: Respond quickly to disputes to resolve issues before they escalate to chargebacks.

Preventing chargebacks from BNPL transactions is challenging due to the constantly evolving nature of fraud. A one-size-fits-all approach is not enough; risk mitigation strategies should be flexible and adaptable. While the tips outlined above provide a good foundation for chargeback prevention, merchants should recognise that the work never really stops. To effectively combat chargebacks, they should proactively address potential issues and stay vigilant at every stage of the transaction process.