Merchants Face Increased Risks Beyond the Cost of Living Crisis

The cost of living crisis has made its impact on consumer spending. 

According to a CNBC poll, over 92% of consumers have cut their purchases of non-essential items over the past six months, among concerns about the economic outlook and high inflation levels. The same poll indicated this was likely to continue for the next six months despite the upcoming holiday season. 

This is the latest statistic in an ongoing pinch in spending that has afflicted consumers for well over a year. Merchants have had to adapt to survive, offering increased financing options to support their customers’ purchasing power. 

However, within this evolution, the drop in consumer spending isn’t the only thing posing a threat. Dependency on a single financing partner could leave merchants vulnerable to rising fees, tightening acceptance rates, and, in some cases, losing their checkout financing options. 

BNPL, the flawed darling of checkout finance

“Checkout finance has been around in one form or another for decades, with stores like Nordstrom issuing private-label credit cards in the 1980s and 90s,” said Melanie Vala, CCO at Deko.  “Thanks to the meteoric rise of BNPL in recent years, it’s become a consumer expectation.”

Melanie Vala, CCO at Deko
Melanie Vala, CCO at Deko

While Buy Now Pay Later (BNPL) has been around for a while, it came into its own during the COVID-19 pandemic. A meteoric influx in e-commerce payments, coupled with economic uncertainty, lay the fertile ground for adoption.

For consumers, it provided a quick, digitally native way to offset payments, while for retailers, it allowed them to provide financing without taking on credit and fraud risk.  In 2021, the sector grew over 230%, and adoption is expected to continue despite regulatory uncertainty and controversy over providers’ practices. Amidst the added cost of living challenges, it has provided many with a lifeline

However, increased economic challenges have added fuel to a shift. Instead of using BNPL to pay for expensive one-off items, consumers have turned to the financing option for smaller, everyday bills

“As a result of BNPL’s significant growth and increased utilization, which transcends Gen Z and millennial demographics, it is becoming clear that the typical ‘Pay in x’ products are not universally suitable,” said Vala. “Finance products are now therefore required to suit a greater variety of sectors, customer profiles, and basket sizes.”

“BNPL is the most familiar form of checkout finance, but it’s too often used to refer, erroneously, to all forms of checkout finance. Technology has since continued to evolve, and consumers are met with more – and often better-regulated – options.”

Diversifying out of dependency 

Vala explained that while consumers are just looking for checkout financing that is simple to use, merchants now have to navigate the range of checkout financing options that will minimize costs and upheaval to the checkout process. 

“Merchants need to ensure that the way customers pay is frictionless and there is a balance between offering more choice and keeping the payment process straightforward,” she said. Often concerned with increasing friction at the checkout and, therefore, decreasing conversion rates, merchants have remained cautious about adding alternative financing options, she explained. Many have opted for single partnerships with financing providers, which has left many vulnerable to any major changes their lending partner makes. 

“For example, if a lender’s risk appetite changes, they could decide to change their lending criteria or even exit the market completely; merchants may then face dwindling acceptance rates or even termination,” she continued. 

Within an uncertain lending environment, this risk increases, leaving many merchants susceptible to issues beyond consumers’ decreased lack of purchasing power. BNPL providers carry an added layer of instability as regulation changes around the sector. 

RELATED: BNPL regulation unclear – merchants’ trust in the balance

The solution to vulnerable dependency on a single lender is to diversify, Vela explained. However, this can raise overhead costs and complexity for merchants. 

“Integrations are often a significant investment to a merchant, and switching over is not a simple process,” she said. Increased overheads and resources to manage multiple lending options are often concerns, and checkout spaces can become cluttered, she continued. 

Vela explained that the uncertainty on how to avoid these issues had made many merchants reluctant to switch and increase their number of lending partners. This could jeopardize their ability to navigate the ongoing economic uncertainty. 

“As the evolution of payment technology and consumer checkout finance options have evolved, the reality is that many merchants are overwhelmed with incumbent providers and understanding how to essentially future-proof their business as it grows – and with it, the needs of its customers,” she said.

“Checkout finance is still seen by many merchants as an add-on feature rather than an agile business strategy. Without the right partner, there is a lot of risk associated with not just disruption to sales e-commerce operations but regulatory considerations and the customer experience.” 

“Merchants must look to agile financial platforms that can connect them to multiple lenders and multiple lending products if they want to truly future-proof their business.”

  • Isabelle Castro Margaroli

    Isabelle is a journalist for Fintech Nexus News and leads the Fintech Coffee Break podcast.

    Isabelle's interest in fintech comes from a yearning to understand society's rapid digitalization and its potential, a topic she has often addressed during her academic pursuits and journalistic career.