Affirm's $300 million deal this week to buy Returnly, a company that manages online returns and post-purchase payments, emphasizes the scale of a problem unique to the buy now/pay later market.
It's usually a straightforward process to return an item to a retailer when the purchase was made via a card or cash. But a buy now/pay later firm is a third party, which creates pain points that can add friction to and erode loyalty.
For the 2020 holiday season alone, returns were estimated at more than $70 billion in the U.S., a 73% jump from the average over the previous five years, according to
The returns process at BNPL firms is complicated because the payment for a good or service is decoupled from the actual good or service, according to Rachel Huber, senior analyst, payments for Javelin Strategy & Research.
"Instead of the merchant managing everything, at least from the consumer's point of view, the consumer may have to ensure both the merchant and the BNPL firm have properly recorded the return," Huber said, adding this is further complicated if a return is made while the original terms of payment are still being made. "If an error is made on the merchant side of the equation affecting the refund status, the consumer is likely to blame the BNPL provider, risking repeat usage and customer satisfaction."
The emerging strategy is to pivot the return into an upsell without increasing financial risk and simplify the experience for the consumer by making the return process appear to be a single experience.
For Returnly, consumer users usually receive an instant merchant credit, enabling a new or replacement item purchase before their return is processed. Returnly assumes the risk and settles the order in real time. The store credit model is similar to Amazon and in line with standards in most of the retail industry, Huber said.
"For one, this keeps the money with the merchant, preserving the sale and helping customer loyalty," Huber said. "From the customer POV, it is also showing goodwill and lets them make a replacement purchase immediately instead of waiting for the original return to process.”
In an email, an Affirm spokesperson said the acquisition will help drive retention and loyalty, and will enable new and existing merchants to attract and engage more consumers at scale.
Splitit, a point-of-sale credit company that ties payments to consumers' existing credit card accounts, contends that credit card link mitigates return risk since the merchant is not directly involved in the financial management of the return.
"Merchants have the trust and confidence in the processing of both payments and refunds, so they can focus on delivering excellent customer service in the return process," said Brian Blank, a senior manager at Splitit, in an email. "The shopper and merchant will work directly to handle the physical return process and we ensure the credit card transactions and processing are completed in a timely and clear manner."
Klarna's PR office said the firm enables consumers to initiate returns in the Klarna app, in the same experience that supports the firm's "wish list" items and incentive marketing. Klarna also integrates with its retail partner's return programs via e-commerce sites.
For any BNPL firm, the goal is to turn around an inherently negative experience of a consumer who no longer wants a product, creating an additional payment and a recurring relationship — the lifeblood for point-of-sale credit companies as the market becomes commoditized. BNPL users are highly likely to use the service again, and to recommend their provider, according to PaymentsSource's research.
If a merchant is able to offer in-store credit easily, it can offer an upsell with additional point of sale financing at low risk, said Ginger Schmeltzer, a senior analyst at Aite Group.
"That drives loyalty to the merchant," Schmeltzer said, adding that for Affirm, bringing Returnly in-house makes returns less of a burden for the BNPL side of the business. "Repeat business is the holy grail for BNPL."
