E-Tailing with FinTech: Instant Return Credit

Problem Definition: Instant return credit (in short, return-credit) is a new FinTech service that offers a store credit immediately upon a return claim, without requiring the return to be received. Improving consumers’ budget, this helps convert online returns into new sales, but it also results in costly fake returns from consumers with low credit-rating. We study whether or not and how retailers should adopt return-credit and its implications on their optimal pricing strategy and profit and consumers’ welfare. Academic/Practice Relevance: This return-credit service is recently launched by a startup FinTech company, Returnly, and adopted by many retailers with impressive results. This paper is the first to provide some necessary guidance for this new practice. Methodology: We build a stylized economic model to capture the basic dynamics and tradeoff of return-credit. For a retailer selling two horizontally differentiated products, we study and compare three different cases: no, unconditional and conditional (on consumer-type) return-credit. For each case, we first optimize the consumers’ sequential decisions involving orders and return and then optimize the retailer’s strategy on pricing and return-credit. Results: The retailer should adopt the return-credit service; when adopt, she should make the return-credit conditional if no additional cost required, regardless of the product category. She should also prepare to switch to an asymmetric pricing, although the two products are symmetric (in cost and consumer valuation). This adoption, however, may hurt all consumers for low-cost products due to the retailer’s elevated pricing power by return-credit. But, making the return- credit conditional on consumer-type will almost always reward high credit-rating consumers, but penalize low credit-rating consumers. Managerial Implications: Our results provide retailers with an initial guidance and insights on how to implement return-credit and its major implications on the retailer (significant strategy change and what product-category to start implement), and consumers (both types of return-credit may hurt, but the conditional one is fairer).