BNPL Chargebacks Explained: How Merchants Can Prevent Disputes
Buy Now, Pay Later (BNPL) has exploded in popularity among consumers, and merchants are taking note. 41% of adults in the United States say that they’ve used BNPL in the last 24 months, according to a recent survey by Statista. And it’s not hard to see why.
As an incredibly flexible payment option that allows customers to break their purchases into instalments, BNPL can easily boost sales, but it can also introduce new chargeback challenges. A 2021 study found more than 13% of BNPL transactions involved a return or dispute, meaning merchants need to understand how BNPL chargebacks work and how to manage the unique risks.
How BNPL Chargeback Works
In a traditional credit card sale, a chargeback means the merchant loses the sale amount (and pays a fee) when the card issuer reverses the payment. With BNPL, however, the dynamics shift.
When a customer uses BNPL, the third-party BNPL provider (e.g., Affirm, Klarna, Afterpay) usually acts as the “merchant of record” for the transaction. The BNPL provider pays the merchant in full at checkout (often minus a fee), and then the customer owes the provider in a series of installment payments.
But what happens if there’s a chargeback?
Who’s Responsible for a BNPL Chargeback?
In general, the BNPL provider initially bears the risk of chargebacks, since they are the merchant of record with the card networks. This is one reason merchants see BNPL as attractive, because it can shield the merchant from direct chargebacks on the front end.
That doesn’t mean the merchant is off the hook, though. If a BNPL customer claims an item wasn’t delivered or was not as described, the dispute might be handled between the customer and the BNPL company at first. But the merchant will likely be asked to provide evidence (e.g., proof of delivery), or even to reimburse the BNPL provider if the dispute is deemed valid. For instance, Affirm’s merchant policy states that if a dispute is resolved in the customer’s favor, the merchant must reimburse Affirm for the refunded amount and pay a $15 dispute fee.
In other words, merchants still end up financially responsible for disputes over BNPL purchases, even if those disputes don’t show up as traditional chargebacks in your processor reports. A pattern of disputes can also lead to penalties from BNPL providers, up to and including account suspension. As such, merchants should manage BNPL disputes as proactively as they do traditional credit card chargebacks.
BNPL Disputes Are on the Rise
Unfortunately, just like all other dispute types, BNPL disputes are on the rise, and they’re catching merchants off guard.
What seems like a simple, customer-friendly payment option can quickly create hidden vulnerabilities, such as delayed disputes that surface months after fulfillment, friendly fraud from buyers who change their minds, and confusion over who to contact when something goes wrong.
Unlike traditional credit card transactions, the extra layer of a BNPL provider can complicate resolution and refund processes. If the customer’s experience isn’t seamless, disputes often end up in the hands of the BNPL provider or the card issuer, and you’re the one who absorbs the cost.
So, what’s driving this surge in BNPL chargebacks?
- Delayed disputes: Because payments are spread over weeks or months, customers may not notice fraud or billing issues right away. This longer window means disputes can surface long after the purchase date, when evidence like delivery confirmations is harder to retrieve.
- Friendly fraud: BNPL lowers the barrier to making large purchases, increasing the chance of buyer’s remorse. Some customers dispute charges to avoid remaining payments, despite having received the product.
- Installment confusion: BNPL provider names (e.g., “Afterpay” or “Klarna”) appear on bank statements rather than your business name. Customers may not recognize the charge and mistakenly file a dispute.
- Refund gaps: Refunds for BNPL purchases involve multiple parties — you, the customer, and the BNPL provider. Delays or miscommunication often result in disputes if installments continue to post after a return.
Do BNPL Chargebacks Affect Dispute Ratios?
You might be wondering whether BNPL disputes “count” against merchants when BNPL providers act as the merchant of record. In other words, could a surge in BNPL chargebacks put a merchant on Visa or Mastercard’s radar for excessive disputes?
The answer is unfortunately not straightforward. Right now, if a BNPL provider is absorbing the chargebacks, those won’t directly raise your processor-reported chargeback ratio. However, relying on BNPL to sidestep chargeback programs is a risky strategy, and things are changing.
First, consider how card networks monitor chargebacks generally. Visa and Mastercard each have programs to flag merchants with high dispute rates.
- Visa’s VAMP thresholds typically kick in when a merchant’s chargebacks exceed 0.9% of transactions in a month (with at least 100 disputes).
- Mastercard’s ECM program is similar, with a standard threshold around 1.5% (and 100+ chargebacks), and a more severe High Excessive Chargeback Merchant (HECM) tier at 3% with 300+ chargebacks.
Exceeding these levels can land a merchant in monitoring programs with fines, extra fees per chargeback, or even threats of account termination if not corrected.
Now, if your customers are mostly using BNPL, your official card dispute ratio might look great because those disputes aren’t tied to your merchant ID. But that doesn’t mean the problem isn’t there.
While BNPL might currently provide a buffer, it’s not a license to ignore dispute management. The underlying risk is still your business’s risk, and it can come back to bite in indirect ways, such as loss of BNPL privileges. Furthermore, the trend we noted earlier — BNPL providers shifting chargeback liability to merchants — could soon connect those dots more directly. If, say, Klarna or Affirm contractually passes chargeback losses to you, then effectively those disputes do hit your bottom line like any other chargeback.
How to Reduce BNPL Chargebacks
Reducing chargebacks in the BNPL context requires a mix of classic best practices and BNPL-specific tactics. The goal is to prevent disputes wherever possible (or at least catch them early) while providing a smooth, transparent experience for BNPL customers.
1. Provide Clear Billing and Communication
Many BNPL disputes (especially friendly fraud) can be headed off by simply keeping the customer well-informed. Make sure the customer knows they are using a BNPL plan and what that entails. This starts on your checkout page (clearly label the BNPL option with the provider’s name and terms) and continues through confirmation emails and reminders. Key things to communicate clearly:
- Payment schedule and amounts: Immediately after purchase, send the customer a schedule of their installment amounts and dates. Remind them that the BNPL provider (e.g., “Afterpay”) will charge their card or account on those dates.
- Billing descriptor: Tell the customer what name to expect on their bank or card statements. For example: “Your statements will show charges from Klarna for this purchase.” This can prevent the “What is this charge? Must be fraud” reaction.
- Order details link: Provide a link or reference so the customer can easily recall what the purchase was (item description, order number) when they see the installment charges later.
2. Streamline Refunds and Returns for BNPL Orders
When a BNPL customer wants a refund or has an order issue, time is of the essence. As discussed, BNPL adds complexity to returns, so it’s on the merchant to simplify that process for the customer. Have a clear, easy refund policy specifically addressing BNPL purchases.
For example, explain on your returns page: “If you used PayPal Pay in 4 or another installment plan, you’ll be refunded through that provider and your remaining payments will be canceled.” Providing that clarity upfront helps set expectations and assures the customer that they won’t be stuck paying for a returned item.
Operationally, train your team on how to handle BNPL refunds promptly. This usually means immediately notifying or logging the refund with the BNPL platform. Many BNPL merchant dashboards allow you to trigger a refund, which will adjust the loan. Use those tools without delay; if the customer sees another installment charged after they returned the product, a dispute is almost guaranteed.
3. Add Extra Customer Service Touchpoints
One big advantage you have to prevent chargebacks is direct communication with your customer. Use it to your benefit, especially for BNPL purchases. Consider adding a few lifecycle touchpoints specifically for BNPL orders, such as:
- Post-purchase check-in: A week or two after the item is delivered, email or text the customer asking if everything is okay with their order. This is a chance for them to voice any issues (damaged item, etc.) to you first. If there’s a problem, you can solve it before the customer resorts to a dispute.
- Pre-installment reminders: As mentioned earlier, remind customers of upcoming payments. A friendly “Heads up: your next Afterpay payment of $50 for [Merchant] is coming up on Aug 15” can reduce missed payments and surprises. Some BNPL providers handle reminders, but a merchant-branded reminder can be a nice touch and reduce defaults.
- Delinquency follow-up: If you get notified that a customer missed a BNPL payment or defaulted, consider reaching out. For example, “We noticed an issue with your financing plan for Order 123. Is there anything we can assist with?” This shows good faith. Perhaps the customer simply forgot to update an expired card. You can encourage them to do so rather than let the loan charge off.
The overarching theme is don’t set it and forget it with BNPL. Good customer service is your early warning system. By engaging proactively, you often can resolve complaints or questions in a phone call or email, saving you the headache of a formal chargeback later.
4. Leverage Pre-Dispute Tools
Just as with regular credit card transactions, merchants should use every tool available to stop chargebacks before they happen. One of the most powerful tools is Visa’s Rapid Dispute Resolution (RDR) system, which automatically resolves certain disputes at the pre-chargeback stage. If you’re not enrolled in RDR and you process Visa cards for any part of your business, it’s time to take a look.
In short, RDR allows you to set rules that instantly refund or resolve disputes according to criteria you define, so they never become chargebacks. For example, you might auto-refund small disputes under $50 or instantly approve a “product not received” claim if the item was low-cost. The benefit is twofold: you avoid the chargeback fee and loss, and the dispute doesn’t count against your official Visa dispute ratio.
Mastercard offers a similar alert service through Ethical (and there are third-party alert networks as well). These alert programs notify you when a customer goes to their bank with an issue, giving you a chance to refund or resolve it before it becomes a chargeback. ChargebackStop’s platform, for instance, allows merchants to manage Visa RDR and Mastercard Ethoca alerts in one place for a comprehensive pre-dispute strategy.
For BNPL-related disputes, pre-dispute tools might help indirectly. Imagine a customer calls their credit card bank to dispute an installment charge, not realizing it’s part of a BNPL plan. If you’re on an alert system, you could get that alert, then work with the BNPL provider to confirm the situation or reach out to the customer. It’s a bit more complex than a normal transaction, but the principle stands: the sooner you know about a brewing dispute, the better your chances of stopping it.
5. Align with BNPL Providers on Dispute Handling
Finally, don’t overlook the importance of your relationship with the BNPL provider itself. Work with your BNPL partners to configure dispute rules and processes optimally. Many BNPL companies have dedicated merchant support for disputes.
- Know the dispute flow: Understand how customers can file disputes with the BNPL provider. Do they have to go through the provider’s app/website? How long do they have? What reasons are allowed? Knowing this will help you anticipate issues.
- Use merchant portals: Most providers (Affirm, Klarna, etc.) offer merchant dashboards where you can see open disputes or chargebacks. Check these regularly. Don’t rely on just emails. Log in and make sure nothing slips through. If the portal allows you to submit evidence or messages, use it.
- Consider rule-based decisions: Some BNPL providers might allow you to set rules for automatically accepting certain disputes. For instance, you might decide that any “fraudulent order” dispute under $100, you won’t contest – you’ll just accept it and let the provider refund the customer to avoid the time and a potential fee.
- Open communication: Maintain a good line of communication with your BNPL account manager or support rep. If you notice a spike in disputes, discuss it with them. They might provide additional data or tips, or at least they’ll appreciate you being proactive.
Remember, you and the BNPL provider both want the customer’s experience to be smooth. It’s in both parties’ interest to minimize chargebacks. The best outcomes happen when merchants and BNPL companies collaborate on dispute prevention and resolution.
Prevent BNPL Chargebacks with ChargebackStop
BNPL can be a win-win for sales if you manage it wisely. We’ve covered how chargebacks work in the BNPL model, why they happen, and how you can fight back against the unique risks; proactivity and transparency are your best defense. By educating customers, tightening your processes, and leveraging tools like RDR, you can dramatically reduce the headache of BNPL disputes.
That said, keeping dispute rates low across multiple payment methods can be complex and time-consuming. This is where ChargebackStop can help. ChargebackStop’s platform acts as a guardian for your transactions, whether they’re traditional credit card sales or BNPL orders. We offer:
- Real-time pre-chargeback alerts and RDR integration to catch disputes before they escalate (so you stay well below those Visa and Mastercard thresholds).
- Centralized dispute management. View and handle your Visa, Mastercard, and even BNPL disputes in one dashboard, with our team’s guidance on responding effectively.
- Automated chargeback prevention rules tailored to your business; no more one-size-fits-all. Our system can, for example, auto-refund certain cases just like you would set up in RDR, but across all your channels.
- Expert support and insights on emerging risks like BNPL. Our team keeps tabs on industry changes and will work with you to adapt your strategy, so you’re never caught off guard by a new rule or trend.
Book a free demo of ChargebackStop today and see how easily you can put BNPL chargeback worries behind you.
