Financial Struggles of 'Buy Now, Pay Later' Services in Currency Exchange Operations
In the ever-evolving world of ecommerce, Buy Now Pay Later (BNPL) services have become a popular offering in the credit and payments space. Klarna, a leading BNPL company, offers global payments in 190 markets and cross-border BNPL services in its 10 core markets. However, merchants offering BNPL for cross-border ecommerce should expect to pay higher transaction fees than domestic card payments.
Merchants can take payments in 12 different currencies on Klarna, but BNPL purchases must be made in the buyer's local currency. Unfortunately, Klarna offers no support for currency conversion, leaving merchants to bear the costs of converting foreign currencies themselves. This can lead to significant additional expenses, especially for merchants selling globally, particularly outside Europe.
The costs associated with cross-border ecommerce purchases using BNPL services primarily include higher transaction fees, currency conversion costs, and potential additional fees related to international payment processing risks. BNPL transaction fees for merchants typically range from 2% to 5% per transaction, which is generally higher than regular card payments that cost 1-3%. Additionally, some BNPL providers like Klarna and Affirm charge a fixed fee of about $0.30 per transaction to merchants.
Cross-border transactions incur extra fees compared to domestic payments due to factors like currency conversion, increased fraud risk, and additional intermediaries in the payment chain. These can increase the cost significantly because international card interchange fees are uncapped and thus more expensive than domestic fees (which are often regulated, such as in the European Economic Area).
Currency conversion fees might be charged by payment processors or BNPL providers during the settlement process of international transactions, adding costs either to the merchant or the consumer, depending on how fees are structured. There might also be compliance and integration costs associated with offering BNPL across borders, such as adapting to local regulations and payment infrastructures, which while not direct fees, add to operational expenses.
The rise in cross-border ecommerce is leading major BNPL companies to expand their services to support cross-border payments. ZoodPay has launched the first cross-border BNPL service in the Middle East, and Klarna rolled out its cross-border BNPL services to all customers by late 2020. Afterpay, known as Clearpay in some markets, has also expanded its cross-border BNPL offering.
As cross-border ecommerce grows, FX management within BNPL products is expected to become more sophisticated. The changing FX rates throughout the BNPL time period can complicate matters for shoppers who are spreading costs over several payments. This is an area where improvements could help both merchants and consumers.
In summary, merchants offering BNPL for cross-border ecommerce should be aware of the increased costs compared to domestic card payments. These costs include BNPL fees (2-5% plus fixed charges) and additional cross-border processing costs like currency conversion and fraud risk management. These increased costs can impact profit margins and require careful management in pricing and checkout design.
Businesses and merchants that offer Buy Now Pay Later (BNPL) services for cross-border ecommerce transactions must consider higher transaction fees compared to domestic card payments. This is due to costs associated with BNPL services (ranging from 2% to 5% per transaction), currency conversion, increased fraud risk, and international payment processing risks.
In the realm of technology, major BNPL companies like Klarna, ZoodPay, and Afterpay (Clearpay in some markets) are expanding their services to accommodate cross-border payments, acknowledging the rising trend in cross-border ecommerce. However, FX management within BNPL products can be complex and may require improvements to ensure smooth transactions for both merchants and consumers.
