Fintech Week London took place in July as the first live in-person fintech event since the pandemic. Over the course of five days, the industry’s key players came together to discuss all things fintech, from open banking to digital ID and cryptocurrency to collaboration.
Buy Now Pay Later is a hot topic right now, not only within the fintech industry but just generally in society. An increasing number of consumers are turning to these alternative payment options with BNPL, with one in five British adults having used a BNPL product.
Wanting to delve further into this topic, The Fintech Times spoke with Alex Marsh, Head of Klarna UK at Fintech Week London to find out what makes BNPL so appealing to consumers.
To watch the interview in full click here.
Marsh began by advising that there are three parts to why BNPL is so popular, the first being that it is an interest-free product, at least in Klarnas case, which compared with possible credit card charges or overdraft fees, certainly becomes more appealing to a consumer.
Secondly, Marsh explained that using BNPL is tied to a particular purchase. So if you’re buying a piece of clothing or some electronics, your use of BNPL is tied to only that purchase.
“So for you as a consumer, it’s not like a credit limit where you can just spend,” said Marsh.
Finally, another benefit of BNPL is the way it’s structured and how the way you repay is structured. “If you use our pay in three products, for example, you would purchase the item paying a third upfront then pay another third after a month and the final third after that. If you compare that to say traditional forms of credit like credit cards where you can spend within a limit and there isn’t necessarily that discipline for you to repay, that can then lead to interest and charges.
“Ultimately it’s saving consumers money, putting the money back in their pocket.”
How is Klarna curbing excessive spending?
One of the main concerns when it comes to Buy Now Pay Later is the possibility of excessive spending, with the potential of consumers going on a shopping spree that they can’t really afford.
Highlighting how Klarna is working to combat this, Marsh said: “There are two parts to this I would highlight, and one is absolutely focused on transparency, both pre and at the point of purchase which is key.
“This is making sure that consumers do understand that this is a form of credit, they do understand the key terms and do understand the consequences if they’ve missed their payments. There’s been a really big push there and really positive progress in the whole sector. I see within Klarna that we’ve helped to drive that improvement in transparency.”
He continued: “The other part which is actually inbuilt into the products but again not necessarily fully understood is around the way our products work is very different to credit cards. We assess a consumer every time that they choose to apply to use Klarna to make a payment. So that might mean I approve you one time, but actually, unfortunately maybe three months later I’m unable to approve you. That could be because you’ve missed a payment with Klarna in which case we’d freeze your account, or it could be that maybe your credit score for example has changed because your circumstances have changed.
“We believe that’s a much more responsible way to adapt to your changing circumstances as to whether you would be eligible or not which is very different to credit cards. With credit cards, you’re given a credit limit upfront and are assessed for that limit, but then you actually have a lot of freedom to spend within that limit, even if your circumstances have changed.
“So actually I think structurally the products are a lot more responsible in the way that they’re built, but we really do need to make sure that consumers really understand the key terms upfront.
The impact of the Covid-19 pandemic
The extreme digitalisation in the wake of the Covid-19 pandemic has had a significant impact on the fintech sector, particularly with payments due to the widespread push to digital methods such as contactless and e-commerce.
For Marsh, he agrees with this but thinks that the pandemic has merely accelerated the trends that were already in place before the global situation.
“There were already trends towards e-commerce compared to bricks and mortar stores and obviously with the pandemic that’s been enforced. So what we’ve found with the retailers we partner with is the new shoppers discovering online, and maybe some of their misconceptions about shopping online they’ve been able to overcome. That could be through the payment options available, say they’ve been able to try Klarna and decide actually they like the flexibility compared to a credit card, but then it could also be things as simple as home delivery and some of the innovations in distribution we’ve seen. The concerns that people may have had to purchase online have been overcome in one way or another, and the pandemic has really accelerated things.”
Klarna has also seen the average age of their consumers increase as a consequence of this increased familiarity with e-commerce, with the average age increasing to 33 years old.
“The fastest-growing age group has actually been Gen X, so 40-54-year-olds. A lot of this is around discovery. Awareness has grown significantly of these payment options. I think there was some confusion initially around “what was the catch” in a way, and not really understanding that it was a merchant funded form of credit and that, in our case, the products did not flip to suddenly being interest-bearing with hidden fees. The awareness and understanding have helped drive that shift, but also with e-commerce more broadly.”
BNPL vs Credit Cards
The debate of BNPL versus credit cards has been ongoing within the industry, with the two payment methods occasionally under scrutiny as to their effects on consumers.
Marsh explained the differences between the two methods saying: “I think that the key difference is that it’s a form of merchant funded credit, and so ultimately the merchant is paying Klarna a small fee to get that flexibility and choice to their consumers.
“I see it as a level playing field for consumers, so all consumers who select that payment option who are eligible will have the benefits of interest-free credit which I think is fantastic. Often what you’ll see is that people on lower incomes are paying my higher interest than those on higher incomes, so actually, I think creating that level playing field is fantastic.
With the Covid-19 pandemic, credit card use has decreased, with consumers paying down credit and an overall decline in credit card balances and issuances.
“One part which we’re very clear on is that consumers have made that shift from credit cards to actually using debit as their main payment method and that’s good. There will be times where credit is the right option, such as if they’re buying online and they’re not familiar with the merchant and want security, or they need the flexibility for an unexpected spend for example. So there is a time and a place for credit and that’s where we think that interest-free buy now pay later is the best form of credit. But we’re very clear that we don’t see our products being used for every purchase that you make.
“Debit is now the primary form of payment, and we think that’s good and right. And so using buy now pay later when you need that extra flexibility or security for certain purchases is ideal. On average a customer uses our products three times a year, so it’s not for every purchase, but we’re there when you need it. “