The ability to buy goods and pay the merchant back over time is literally
ancient, perhaps 5000 years old, but it is only in the last few years that Buy Now, Pay Later (BNPL) apps have made deferring payments as easy as clicking a button. Spearheaded by the Swedish fintech company Klarna, BNPL is now a fixture of eCommerce and in-store checkouts, with Amazon, by far the world’s largest internet retailer, launching its own BNPL solution in partnership with Affirm, the
main BNPL provider in the US.
Not willing to be left behind, established companies are joining in, with
Goldman Sachs, and Apple all planning BNPL offerings. We are seeing in miniature a repeat of the surge in activity that surrounded the first dot-com boom, or recent interest in blockchain technology and decentralised finance, and it’s clear why. With
costs of living rising and
wages stagnant, ordinary people need all of the help they can get to afford items that are technically classed as luxuries but which in practice are essential for living in the modern world, like a smart phone or new as opposed to used clothing.
The pandemic has certainly played a factor.
More people than ever are shopping online, and with consumers unable to access nights out, restaurants or holidays for much of 2020 and 2021 many chose to shop for entertainment online, buying new televisions or games consoles. Klarna made an intelligent move by orientating its marketing towards millennial and Gen-Z consumers – these demographic groups hold a
surprisingly small share of the world’s total wealth, so they are more likely to need help in buying products. They also are the age group
least likely to have, or even to want, traditional forms of credit like credit cards. This said, stores popular with an older age cohort like
Argos are also offering BNPL services alongside traditional interest-free credit.
Ease of use for customers and businesses
Perhaps the key factor is that BNPL is incredibly simple to use. While applying for a credit card is a lengthy process that often results in either rejection or dashed expectations in terms of credit limits and applying for interest-free credit requires documentation, setting up an account with a BNPL provider is supposed to be easy enough that you could do it while waiting in line at a checkout.
44% of BNPL users cite convenience as the main reason that they use the service.
Given their explosive growth over the past few years and the fact that there are customers who
won’t use retailers if they don’t offer BNPL services, businesses are keen to add BNPL to their list of payment options. Although no surveys of businesses offering BNPL have been undertaken so far, we can imagine that their reasons for doing so mirror those of consumers: it is easy for them to set up and they can reach buyers who might have not made a purchase otherwise – Klarna has found a
58% increase in average order value from customers using its service and Affirm projected a 20% increase in conversion rates.
We also can’t ignore the fact that online fraud is also
growing exponentially, and many BNPL providers assume the risk of any fraud committed using their payment method – businesses know that fraud is going to happen, so this is a good way to offload some of the burden.
Entering the financial mainstream
However, despite the clear advantages of BNPL to consumers and businesses, there is talk of regulating BNPL more closely to avoid it becoming ‘the next Wonga’. This payday lender followed a similar trajectory of overnight success off the back of providing a necessary service for consumers starved of disposable income, but collapsed after thousands of customers found themselves stuck in debt.
It doesn’t look like Klarna in particular and the BNPL space in general is headed down the same path. With a $100 billion market cap representing 2.1% of global eCommerce, the BNPL space is firmly established as a part of the retail world. Klarna has already
released a raft of changes aimed at avoiding a regulatory crackdown: “introducing the ability for consumers to pay in full at the checkout, stronger credit and affordability checks, clear checkout language, simplified T&Cs, improved complaints handling and removal of last remaining late fees.” Only time will tell whether these changes will be enough to prevent governments from regulating the industry in such a way that it erodes its core appeal.
As with any new innovation, there is always a period of
pushback, particularly against Klarna as the avatars of the BNPL craze, and this is to be expected. But there were
early critics of the internet who predicted that it was a fad destined to wither away within a few years. With BNPL, the use case is so strong and the underlying factors that make it attractive to people are so unlikely to change that we can fully expect it to become a standard part of payments for the foreseeable future.