#227 Buy Now, Pay Later Is About to Blow Up (What This Means for eCommerce)

Buy Now Pay Later just hit $20 billion in holiday spending. Sounds great, right? Until you realize 41%— 41% of users missed a payment last year, and 59% admit they couldn't afford the purchase to even begin with. So shout out to Dave Ramsey, who will most likely be covering this on an episode if he hasn't already done it 100 times. So here's the part nobody talks about: when BNPL— Buy Now Pay Later— payments fail, the customer doesn't lose, the merchant does. You already paid the 4 to 6% BNPL fees. You already shipped the product, and when the consumer regrets it, you're eating the return. Now add this: by 2026, regulators in the US, UK, and Australia are tightening BNPL rules. Approval rates are expected to drop 10 to 20%. What does that mean? Means if BNPL is going to drive 20 to 30% of your conversions, what happens when that disappears? That's what we're breaking down today, because BNPL isn't free. Money. It's a margin leak if you're not tracking it. Welcome to the High Voltage Business Builders Podcast Weekend Review. I'm Neil. Today is February 6th. We're going to break down what actually happens with the buy now pay later thing and why it's about to get messier for operators who aren't paying attention, and what you need to do right now to protect your margins before this thing blows up in your face. So let's get after it. One of my friends was going through his emails the other day and got a receipt from his wife who made a purchase online. You know, one of those orders have been confirmed things. And he starts looking through it and he says, hey, payment plan, 4 interest-free payments of $37.50. And he's thinking, we bought a candle. It's a $150 freaking candle. So before you judge, it's one of those fancy little candles with the hand-poured thing, smells like a Norwegian forest at dawn or whatever. I don't know, makes his wife happy. So it got me thinking, I'm sure he didn't need to split that $150 candle into 4 payments. I guess the only thing more ridiculous than that would be the 4-month payment plan. The candle has a freaking mortgage on it. But the option was right there at checkout, pay in 4, no interest, no fees. And honestly, why not? It increases your buying power. There's no interest. It makes sense. Makes sense, and from the seller's perspective, that candle company just made a sale they might not have otherwise made, right? That sounds great. But they also paid Klarna or Afterpay or whoever gets the 6% to process that transaction. So instead of keeping $150 minus the usual 3% credit card fee, they kept $150 minus 6%. Now here's the kicker. What happens in 2 weeks when my friend's wife decides the candle smells more like a Swedish forest than a Norwegian one and she wants to return it? The seller has to refund the full amount, but they already paid that BNLP fee. And now they got a half-burned candle back with inventory. It made me realize buy now, pay later isn't just a payment option. It's a business decision with hidden costs that a lot of operators aren't tracking. So right now, BNPL is everywhere. It hit $20 billion in holiday spend last year, up almost 10% year over year. In fact, the market is growing at 19% annually. And by 2031, we're talking about $258 billion in industry in the US alone. Shopify's got it. Amazon's got it. Every checkout page that has those little buttons that says Klarna and Afterpay and Affirm and There's even a PayPal Buy Later one too. And on the surface, it looks like a win-win, right? Customers get flexibility, merchants get high conversion rates, and bigger average order values come out. But here's what nobody is talking about. Of course, nearly 41% of those users missed at least one payment last year. So 4 out of 10 people can't make those payments on time. And that's— 59% admitted that they couldn't afford it in the first place without that. So if you're a seller accepting BNPL, you're not just offering payment flexibility, payment flexibility, you are subsidizing purchases that people can't actually afford. So when those bills start hitting, when we, when that sets in, finally, we're gonna see about 26% of them regretting the purchases. And what do people do when they regret buying something? They return to it. And who's eating all those costs? That's what we're gonna talk about today, guys. So last episode, just to recap for you, we broke down the TikTok halo effect and proved it with real data. So TikTok isn't just driving sales on TikTok Shop, it's creating demand that shows up later on Amazon, Shopify, and DTC sites. TikTok is officially measuring offsite impact. Account levels show 10 to 15%, which is awesome. And TikTok revenue generally happens off platform. So third party shows that one-third of TikTok's influencers never show up inside of the TikTok dashboard at all. It's influence, right? And what does that mean? A lot of operators are underestimating TikTok because they're only looking at the last click attribution. Search closes demand, social creates the demand, Amazon captures the demand, and so does Shopify. So we talk about understanding where payment and demand comes from. So serious operators track the full picture, not just what converts inside one platform. So go check out that last episode from the weekend review last week, and we'll be caught up. So that brings us up to today's topic again, because demand gets easier to create when checkout gets more flexible, and when tools like BNPL lower friction even further, the risks don't just disappear, they move downstream, and that's exactly what we're unpacking today. All right, so let's start with the numbers really quick. We mentioned this a minute ago. Let's get some additional context. BNPL market hit $107 billion in 2025. Again, projected to grow to $258 billion by 2031. It's a compound annual growth rate of 19%. Globally, we're talking $500 billion in 2025, headed towards $911 billion by 2030. So over 86 million Americans used BNPL in 2024. By the end of 2026, that number is expected to hit 96 million. That's crazy, right? So it now accounts for over 5% of all global commerce transactions, e-commerce specifically. And in some categories, fashion, electronics, home goods, it is much higher. So yeah, adoption is real, growth is real. Merchants love it because it drives conversion. Now, studies are showing that it can increase conversion rates by 27%, a lift of average order value increasing 20 to 40%. And if you're a merchant, that sounds like magic. But here's where the story starts to crack. Again, default rates are climbing. More than 4 in 10 people missed one payment last year, and that number keeps rising every year. So the official default rate looks low, the low But the late payment rate is exploding. And the reason default rates stay low is because BNPL providers are aggressive about collecting between loans that are 120 days delinquent. But late payments, those are everywhere. Now, why does this matter to you as a seller? Because every late payment increases the likelihood of a return. Think about it. Someone buys a $150 jacket from Klarna, 4 payments of $37.50. The first payment clears automatically, no problem. Second payment, maybe they forgot to load their account, it bounces, they get hit with a $7 late fee. The third payment comes up. Now they're stressed. They're juggling other bills. They got the other 3 BNPL loans stacked up, which, by the way, 63% of BNPL users have more than 3 loans. And by the time the fourth payment rolls around, they're over it. So what do they do? They return the jacket.

Guess what?

You, the merchant, already paid that fee. You paid the 4 to 6% of the sale of $150 upfront. Customer gets their money back, you eat the fee, and now you got a used jacket in your inventory. So this is the hidden cost behind most operators who are not tracking this. Let me say this clearly, if your customer needs 4 installments to buy a $60 product, that's not necessarily a qualified buyer, that's possibly a future return. So just be aware of this. So let's talk about what most operators get wrong when they look at this. They see the conversion lift, they see the average order value, and they stop. They don't track the numbers separately. It doesn't measure through return rate by payment method. They don't calculate the actual net margin after fees or returns. That's a mistake. Because BNPL— I can't say that very well. That's a hard phrase, guys. BNPL customers are fundamentally offered different than credit card customers. Here's what the data shows. They're usually more financially stressed. Again, they admit they couldn't afford it, 59% of them overall. They have 35 regularly overdrawn accounts or missed payments on their debits, and they're not the most stable customers, guys. So users spend about 6% more per transaction than non-BNPL users, and they also return products 15 to 20% more. So Your AOV goes up, your return rate goes up too, and the returns can be expensive, especially if you got larger products, of course, and you have to pay the shipping and return, and you're paying overstocking, you're paying for the BNPL fee, the original transaction, you are tying up cash and inventory that might not sell again at full price. The merchant fees are 60% to 100% higher than credit card fees. Credit cards cost you 2.5% to 3.5%, a BNPL costs you 4% to 6%, sometimes as high as 8%. So for low margin businesses, that can be brutal. One study found that you need at least 25% to 30% product margins to absorb those fees without killing it profitably. And if your margins are below 15%, you're probably losing money on every one of those sales. Now here's the kicker. A lot of platforms auto-enable it without you even realizing it. Shopify, Amazon, BigCommerce, they integrate with all these different methods. You might not be offering it right now and not even tracking it as a separate payment method, and that's the problem. And just when you thought it couldn't get any more fun, we got regulators stepping in. So let me pause here for a second, because if you're listening to this and thinking, okay, this explains why my margins feel tighter than they should be, you're probably not alone because a lot of sellers are generating revenue but bleeding profit because of hidden costs like this one, the fees, the returns, cash flow timing, things can compound really fast. And inside Voltage, we help operators clean this stuff up. If you're a seller who wants to become an operator, you must look at your margins, We look at your payment mix. We look where you are and where you're losing your money and where it needs to be tightened up. Not theory, not hype, real P&L work at the business level. If you want to help getting your margins back under control, head over to voltage dm dot com. Check out a workshop, take a quiz, or contact me directly at neil at voltage dm dot com. Okay, let's jump back in it. So let's talk about the regulators thing because this is where things get really messy, and for the merchants who rely on it, it's about to get a lot more regulated. So this has lived in a gray area because it wasn't a credit card or a loan, so it skipped the usual rules. There were no credit checks, no income verification, no bureau. reporting, and that window is obviously coming to an end. So the US is pushing to report credit bureaus and follow credit card style dispute rules. It's better for customers, slows checkout, and tightens approvals. In the UK and Australia, we'll be forcing into real credit card rules, accountability, affordability checks, stricter approvals, and less frictionless checkout. Approval rates that sit around 90% today are expected to drop 10 to 20%. That means fewer approvals and fewer conversions. So here's the takeaway. BNPL won't be as easy. Approval rates will fall. Conversion rates will follow. So you better get qualified buyers, which is good for you, but you'll get fewer of them. Okay, fine. But if BNPL drives 20% to 30% of conversions today, you should be planning for 15% to 20% tomorrow. So what exactly should you be doing about this? Track it separately. Don't bump it into sales with credit card sales. Track them separately in your analytics. Conversion rate methods should be tracked. Return rate payment methods should be tracked. Net margin after fees and returns should be tracked. You need to get to know if BNPL is actually profitable for you. A lot of sellers are shocked when they run the numbers. Operators should not be shocked. Sellers will be. Remember, we've talked about the differences of this a lot. Second, restrict it to higher profit products, right? If you're selling something like a 10 to 15% margin, It's gonna kill you. You're selling in the 40%, 50% margin, it can probably make sense. Selling in a minimum order of 100 to 250, whatever makes sense for your margins, just don't let customers do an impulse buy at $30. That return rate is gonna kill you guys. Third, build cash flow buffers, right? It changes your cash flow timing. You get paid upfront, so the provider minus the fees, but the customer returns the product 2 weeks later, you'll have to return that to the provider. And now you're just waiting for the provider to settle the return. So that creates a cash flow volatility. If you're running lean, that can hurt. Buffer, buffer, buffer. 30 days, 60 days, whatever gives you the breathing room. Fourth, watch your return rate like a hawk. Your overall return rate can be 10%, but your BNPL return rate is 20%. You got a problem. That means it is attracting buyers who aren't committed. They're browsing with other people's money. They're not thinking long term. They're treating your inventory like a 2-week Netflix trial they keep forgetting to cancel. And that's when the bill comes and they bail. So fix this by offering better product descriptions and photos, which reduce surprise returns, tightening your return policy, communicating upfront that BNPL doesn't mean try before you buy. And here's the bottom line on all of those things. It isn't free money. It's a tool. And like any tool, it works if you use it the right way and will hurt you if you don't. So let's zoom out for a second. It's a bigger part of an overall shift that's happening in e-commerce, right? Customers want flexibility, they want control, they don't wanna carry credit card debt. But there's more going on. People are feeling the pressure of the economy. Prices are up. Money feels a little tighter in some ways. And BNPL has become a way to stretch cash flow, not just a convenience. At the same time, that flexibility is making people careless. I literally saw someone put a bottle of shampoo on Afterpay. So if you need 4 installments of a bottle of Head and Shoulders, we're having social crises that don't just trigger to e-commerce. That's unsustainable trends. And whenever this behavior gets risky, the system will always change. And what's changing now is who provides that system for flexibility. Right now, standalone BNPL companies like Klarna, Affirm, Afterpay dominate. Okay, that's— banks are coming for them, end of story. Citigroup, American Express, JP Morgan, they're rolling these features out tied to credit cards. Apple killed Apple Pay Later and shifted to bank-issued installment loans inside Apple Pay. What do you think they figured out, right? PayPal's Stripe and Shopify, they're all embedding it directly in the checkout. So what does this mean? It's becoming an infrastructure, not a differentiator. In 2 to 3 years, every checkout will have some version of pay in installments. And when this happens, the competitive advantage disappears. And what matters for them? Margins, fulfillment, product quality, customer experience, the fundamentals of business. Yay. It can give you short-term conversion boosts, but it's not a business strategy unless you can make the net profit work. And if your entire growth plan is to offer it and hope people will buy more, you're gonna be in trouble. Because when people offer this, you can clearly see that they're not on the right track from the very beginning. They're competing on price, speed, and execution, and that's where disciplined operators will win. So guys, remember again, this is a useful tool. You can ignore it, you can have it quietly eat your margins until you wonder why you're not profitable, but you can do things about it, right? And the bigger system is the issue underneath all this, right? Weak systems are the problem. When margins are thin, cash flow is tight, and you don't know the numbers by the payment method, by your business, by your channel, and you don't understand what things like BNPL are doing to help you or hurt you, they will expose you. And that's why a lot of e-commerce businesses feel like they're working and never actually get ahead, right? Revenue looks fine, sales look good, profits are disappearing. Where'd they go? All right, which brings me to this. If you're serious about building a sustainable, real e-commerce business, not a side hustle hobby, this is for you. Amazon rewards preparation, not experimentation. Dominate, a 12-week live cohort with us, is structured to provide you with your first product launch. We're gonna keep it small, 10 operators only. It's a 12-week live product discovery, validation, launch execution, optimization. No guessing or wasted cash. Hitting 25 sales a day is the goal to get you through inventory and cash flow, to make sure you follow things like BNPL when it's there so you know you've got a profitable product starting on Amazon, going to Walmart, and then going to TikTok and beyond. If you want to build a business that endures, meets market challenges like the dropping BNPL approval rates and rising fees, this is the blueprint to keep your business profitable. There are only 10 seats. If it makes sense for you, message me interested keyword 417-765-0412 if in the US or Canada. That's interested to 417-765-0412 if in the US or Canada. Email me directly at neil@voltage dm.com with interested in the subject line if you are international. Again, this is invite only. This is an investment, and all the spots are intentionally limited. All right. Now, for the rest of you who are hanging out here, let me tell you basically what you need to know here. It isn't going away, but it is easy money, and that's where things get trouble. They get to be trouble for sellers. Operators know easy money has its problems. So fees are rising, approval rates are tightening, returns are increasing, and platforms are getting less forgiving. The operators who win from here aren't chasing tools. They aren't wasting time not building systems, and they are making sure they understand their bottom line and they know their numbers. If this episode has helped you see BNPL differently, share it with another operator or seller who's probably feeling the same margin pressure but hasn't figured out why and wonders what they can do to make it happen. Again, guys, I appreciate you joining me. Like, smash the subscribe and share button. Let's get ahead of anything that keeps you up and keeps you from getting in a business that's ugly. And build your business with the end in mind, the potential exit where all of this will be worth it in the end. I'll see you guys on the next episode.

You this: If you're serious about building an e-commerce business starting on Amazon FBA, what if myself and my team worked with you one-on-one to execute the steps outlined in the podcast while helping you discover what the heck to sell, how to make sure it's profitable, and how to successfully launch a brand? Plus. How to do it under a consulting plus performance-driven model where I put a $10,000 skin-in-the-game guarantee for those that show up and are serious about building a real business done with us? If yes, text keyword profit to +1-417-413-4209. That's 1-417-413-4209. And I will personally respond with a few simple questions. If you're not in the US or Canada, please visit voltage dm dot com. That's voltage dm dot com. Click get started and book a no-pressure discovery call with me. Or a member of my team to learn more about the Business Builders one-on-one coaching and mentoring for CEOs, entrepreneurs, and those looking to build an empire or retire using the power of e-commerce. Once again, thank you for listening, and be sure to tune in next week for a brand new episode of the High Voltage Business Builders Podcast.