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How can BNPL Companies resolve Collections Issues

by receeve
Thursday, April 7 2022

#BNPL

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Buy now, pay later (BNPL) has redefined how consumers shop and has become increasingly popular over the past few years. This growth shows no sign of stopping anytime soon. Consider the following figures:

  1. The global BNPL market was worth roughly $266 billion in 2021;
  2. However, it’s estimated to reach $3.98 trillion by 2030;
  3. Experts have predicted that by 2026, “buy now pay later services will account for over 24% of global eCommerce transactions for physical goods by value, from just 9% in 2021”. 

This meteoric growth is hardly surprising. Consumers can spread the cost of goods over several months with a 0% interest rate, making it easier and pressure-free to purchase high-value items. Therefore, BNPL companies (which are usually eCommerce businesses) have generated a large number of sales using this method. 

Except, there are also significant downsides to BNPL. eCommerce businesses expect that customers will be able to pay them back. When customers are in default, however, BNPL companies need to engage in customer-centric collections strategies to protect their brand’s reputation and to guarantee their customers’ satisfaction.

Let’s examine the risks that BNPL companies face when customers can’t repay their debts, outline how BNPL companies can recover their debt and increase their cash flow, and finally discuss why retention is more important than acquisition. 

The risks that BNPL companies face

BNPL companies will only survive if they can collect what customers promise to pay them. Unfortunately, this isn’t as easy as it sounds. Consumers often use BNPL because they don’t have enough money to pay for goods outright at the time of purchase. However, if they still can’t afford to pay when the time comes for their pre-arranged repayment, then BNPL companies are in trouble.

This affects even the largest BNPL organisations. Klarna recorded credit losses of up to £81 million in the first half of 2021 due to collections not keeping up with the pace of accounts going into arrears. Afterpay reported a $156.3 million loss (in Australian dollars) over the last financial year, a 700% increase from the year before. Likewise, Zip—another Australian BNPL company—recorded a $652 million loss. This was a staggering 3,000% higher than the year before. 

Unfortunately, BNPL companies don’t have the infrastructure in place to identify potential high-risk accounts, or to stop customers from going into default. Most of them are eCommerce companies, not banks, and they often lack the ability to resolve consumer loans, which leaves them vulnerable to unknowingly dealing with customers that chronically fall into arrears.  

How can BNPL companies recover debt and increase cash flow?

BNPL companies have three potential strategies to recover their debt and increase their cash flow. Let’s examine these options in detail.

  1. Use a debt collection agency (DCA)

Rather than trying to collect their debts in-house, BNPL companies can outsource this tricky, awkward process to professionals—in other words, to DCAs. Except, this is far from optimal.

DCAs are generally renowned for using overly aggressive dunning strategies. Collections agents constantly call past-due customers and if they do get through, they often use threatening language. DCAs have even been known to target past-due customers’ family members when trying to persuade them to pay back their debts. 

If BNPL companies use DCAs, their brand’s reputation will quickly take a hit. Past-due customers will probably never buy from the company again. In fact, they will probably warn others against doing so either. BNPL companies might successfully recoup what they are owed for one particular purchase—but they will lose out on any future sales in the process. 

  1. Build their own collections solution

BNPL companies can always choose to build their own collections solution, taking their recovery processes in-house. Unfortunately, this isn’t as simple as it might sound. Companies would have to dedicate a huge amount of IT resources to the project, enlisting programmers, coders, UX and UI designers, and so on. The project would be incredibly time-consuming and energy-intensive.

This is counterintuitive. BNPL companies need to increase their cash flow, and not spend huge sums of money on new projects. 

Plus, this new solution would also have to pass all the necessary compliance and regulatory checks. The entire process of developing, optimising, certifying, and rolling out this solution would be an unwelcome distraction and a massive headache. 

  1. Implement modern collections software

This is by far the best solution. Implementing modern collections software offers the best of both worlds. BNPL companies can handle collections in-house and avoid the reputational damage of working with aggressive DCAs. Moreover, they can immediately use a ready-made, easy-to-use, and incredibly customer-centric solution. 

The best collections management software makes life as easy as possible for collections agents. Using no-code drag-and-drop template builders, collections employees can create new dunning messages themselves (or edit existing messaging) with ease without relying heavily on the IT department.

Employees can contact customers on their preferred channels, including social media, SMS, or email. Collections managers can dive into all-in-one data-driven dashboards, analysing key KPIs and identifying which strategies are most effective for which customer segments. 

From the customers’ perspective, they are contacted on the right channels, with the messaging that they respond best to, at times that are convenient. They can self-serve, repaying their debts in full online or setting up instalment plans according to their current financial situation. 

However, not all collections software providers are equal. BNPL companies must rigorously evaluate potential providers before picking a solution. They need to consider the potential implementation time, whether the solution is flexible and customisable, and the security protocols that it has in place. 

Why retention is more important than acquisition

Acquisition is expensive and time-consuming. It’s estimated that acquiring a customer is anywhere from 5 – 25 times more expensive than retaining an existing one.

On the other hand, retention is simple—you’ve already acquired the customer.  In fact, increasing customer retention rates by just 5% can unlock 25 – 95% more revenue. Plus, word of mouth means happy customers bring in even more customers.

If you retain customers at scale, you’re clearly doing something right—and pleased customers will gladly tell others about your business. This will increase new customer acquisition, boost sales, and increase your overall revenue. 

Increased retention turns into increased revenue. It’s as simple as that. 

Take a customer-centric approach to BNPL collections

No BNPL company wants to chase up past-due customers, but it’s a risk that these companies take on. So how can they effectively collect what they are owed? Well, first things first, they need to be just as customer-centric as they were before they made the sale.

Using modern collections management software, BNPL companies can create dunning processes that work for both their customers as well as for their businesses. They will decrease their debts, increase repayment rates and case flow, and transform customer retention.  

Want to learn more about the facts and news of BNPL? Download our whitepaper to discover how BNPL is changing buyer behaviour.