What does a booming BNPL sector mean for the future of consumer credit?
Over the past few years, in the UK, as well as across the globe, consumers have increasingly shifted away from revolving interest and fee-bearing credit cards in favour of debit cards for their day-to-day expenses. When they want more flexibility or security, they are showing a strong preference for buy now pay later (BNPL) products, which allow them to spread the cost of a purchase over a short period of time in interest-free instalments, and in Klarna’s case with no late fees. As online shopping soared during the pandemic, we’ve seen consumers’ appetite for flexibility increase even further.
Consumers want better ways to pay, shop and bank.
With physical stores forced to close over the past year, consumers looked for better ways to pay for their online purchases that would allow them to try a product before paying for it - which is difficult when shopping online.
Our recent report with Capital Economics, ‘BNPL and the new economic landscape’ confirms that a vast majority (78%) of UK consumers that have used BNPL services identified a flexible return policy and the security it provides when buying from unknown sellers as ‘important' in their purchase decision.
At the same time, consumers are recognising that BNPL solutions represent a fairer, more transparent and convenient way to get credit. When we recently asked 7,000 UK consumers why they use Klarna, 73% said it’s because we charge no additional fees and half agreed that Klarna is a cheaper and better alternative to a credit card.
In fact, unlike credit card companies, whose profits are based on interest and fees charged on the most vulnerable customers, we have zero incentive to lend money to those who might not be able to pay us back. We only lend very small amounts to new customers for their first purchase and we provide a clear repayment schedule that puts consumers in control of their finances, and means they don’t get trapped in a revolving cycle of increasing debt.
By using BNPL instead of credit cards, Capital Economics estimated that consumers saved a whopping £76 million in interest charges alone last year. This is in part why in 2020, UK consumers reduced their outstanding credit card debt by a record £10 billion while BNPL, and Klarna, experienced such extraordinary growth.
As the BNPL sector continues to grow, there is incredible potential for consumers to save hundreds of millions of pounds in interest and fees each year.
Used responsibly, Klarna pay later products are for everyone.
While this might not make headlines, the truth is that consumers of all ages - over 18 of course - enjoy the flexibility and convenience of BNPL. According to Capital Economics, a fifth of the UK’s adult population, or 10.4 million people, used a BNPL solution in 2020 to make a purchase online, spending £4.1 billion and accounting for around 4% of all online retail sales.
At Klarna, the average age of our customers is 33 years old, which is older than the average first-time homebuyer, and our fastest-growing demographic is between 40-54.
We make Klarna available only to customers who we believe can comfortably afford to make the payments. We conduct strict eligibility assessments each and every time that someone tries to use our products, which include a soft credit check with the Credit Reference Agencies (CRAs) as well as a review of over 180 other data points. This approach allows us to have a clear and real-time view of someone’s financial situation.
As savvy shopping and spending is at our core, we ensure we lend and promote our products responsibly. We monitor for unusual behaviour and restrict late night spending. Consumers who do not use our services within their means are restricted from further use. We also have a dedicated vulnerable customer team that can help on the very rare occasions someone struggles to pay. We provide 24/7 chat support and consumers can also pause payments for up to 10 days at no extra cost.
We also encourage our consumers to be mindful when they shop. Our biggest marketing investment last year and again this year is targeted at supporting responsible spending and reducing impulse shopping.
To make sure consumers - and retailers - get the best possible experience with our BNPL services we are fully transparent in our communications about what we offer and how our products work, making it clear that BNPL products are credit products and that there are possible consequences for non-payment. As many of the messages that consumers see come not from us but from our retail partners, we’ve worked with Fairer Finance on our guidelines for merchants, to make sure they meet our same high standards in transparency and responsible communication.
Consumers deserve the highest level of protection and up-to-date regulation.
The BNPL industry is growing fast and we see lots of new players with different standards when it comes to eligibility checks, payment schedules, customer protection and fees.
At Klarna we are already operating at the highest standards and are comfortable operating in a regulated environment: after all, we are a fully licensed bank in Sweden and already offer a number of regulated credit products in the UK.
But we totally agree the current UK regulations have not kept up with innovation and that a new framework is crucial for raising standards across the sector. That’s why in February, we welcomed the FCA’s Woolard Review and have fully engaged in a process that will offer further protection to our over 15m customers and 15k retail partners in the UK.
We believe that the BNPL sector needs a modern, proportionate and fit-for purpose framework to ensure the highest protection for consumers and foster innovation and competition among providers.
Ahead of regulation, we are already working with CRAs to help them update their infrastructure, so that it is fit for the digital age. We are also introducing new technologies to improve our affordability assessments, such as using Open Banking to get a real-time and more accurate picture of customers' finances. We are already using this in Germany and plan to begin trials in the UK shortly.
As a leading force in global payments and retail banking, we are committed to working with the financial services industry, the retail sector, the government and regulators to build a framework that delivers the best possible outcome for our customers.