Buy Now Pay Later services are something of a hot topic at the moment, not only within the fintech world but in most walks of life. Particularly during the financial hardships of the Covid-19 pandemic, usage of BNPL has exploded across the UK, with a review into the market by the Financial Conduct Authority found that usage had nearly quadrupled to £2.7billion in 2020. With the younger generations particularly keen on these payment spreading methods, some have called for better regulation of the industry. However, the question remains whether or not these services are better for our finances than traditional credit.
Buy now pay later giant Klarna certainly thinks so and have launched their new #WhyPayInterest campaign. With the company reportedly saving UK consumers £76million in credit card fees alone last year, the campaign highlights the difference between buy now pay later products and credit cards, challenging what they refer to as the outdated credit model that saw Brits pay £5.7billion in credit card interest and fees in 2020 alone.
Klarna CEO Sebastian Siematkowski has said consumers are better off with a buy now pay later model as it is cheaper and does not charge interest or late payment fees. With credit cards offering larger borrowing limits and can easily rack up hundreds if not thousands in debt quickly, the company has stressed that Klarna gives credit on a purchase by purchase basis and is, therefore, safer for the consumer.
This campaign comes alongside the announcement of Klarna’s new shopping app, allowing users to “pay in 3” in any online store, covering the whole retail journey.
This new Shopping feature allows UK Klarna users to shop at any online retailer, regardless of whether they’re partnered with Klarna or not, and split the payment into three interest-free instalments – eliminating the need to use a credit card. It will also integrate monthly budgets and personal spending limit functionalities for users to set and remain in control of their spending.
Sebastian Siemiatkowski, CEO of Klarna said: “At Klarna, we believe that no-one should ever have to pay credit card fees or high-interest rates and now, thanks to our new in-app shopping feature, they don’t have to. Shoppers now can interact with their favourite retailers without having to leave the Klarna app, to create a smooth, safe and frictionless shopping experience. Our one-stop-shop app is the future of shopping, it creates a truly personalised and bespoke service for every user and liberates consumers from ever paying more than the price of the product.”
What does the industry think?
There is still some apprehension within the industry on whether BNPL services can harm consumers, causing them to get into debt and spend more money than they have.
Minck Hermans, Co-founder and CEO at borofree said: “What I feel is one of the key issues with buy now pay later is that people don’t really have the idea that they’re spending money. The customer journey has almost detached itself completely from the fact that you’re actually spending your money and could even be spending money that you don’t have that you have to pay back later.
“I feel some people are also negatively surprised by the cost that it can involve. In recent research by borofree, we found that 20% of all BNPL customers felt that they weren’t necessarily informed properly of what the consequences were.”
James Andrews, senior personal finance editor at www.money.co.uk, had some particular thoughts on Klarna’s new service, and said: “Klarna’s new service fundamentally misunderstands the point of credit cards if it thinks it can eliminate them. It also doesn’t seem to understand how they work in practice.
“The shopping service proudly states that it saves people £144 of credit card interest every 60 seconds, but there’s no interest on credit card purchases for 56 days on a standard card. That means if you split your payment to your card provider in 3 the way Klarna does, you’re saving yourself a grand total of 0.2% interest on your purchases on a standard 20% credit card APR. If you pay up 4 days early Klarna saves you nothing.
“And credit cards offer far more flexibility than Klarna. The pay in 3 option it offers is something you can’t alter. Instant ring-fencing of the first set of money, then the next two payments coming at set 30-day intervals. With a credit card, you pay as much or as little as you like as long as you meet the minimum repayment amount each month. And that’s just the most basic credit card function.
“Using the right credit card lets you split payments over as long as 21 months currently, with nothing to pay at all for the first 56 days. If you’re making a string of purchases or buying something expensive, that blows the Klarna offering out of the water.
“Of course, you need to use your card responsibly to benefit from all this, but simply setting up a direct debit for the entire balance on a card when you take it out means you never need to think about that again.”
With many financial products there are risks, with Andrews further advising that another negative aspect of Klarna and similar services is that they do not report spending or missed payments to credit reference agencies, meaning your score will not be affected when lenders look into your payment history (though it should be noted that Klarna are currently looking into this.)
He said: “That’s not actually a good thing. Using, then repaying, small balances on a credit card is one of the best ways to build up a credit score there is. Using Klarna instead of a credit card cuts you off from this possibility.
“And if you’re worried about your ability to repay, or forgetfulness will see you miss payments on a credit card, why would Klarna be any different? It’s still debt that needs to be repaid, and while the penalties are less with Klarna than with the fees and credit score downgrades that come with a traditional card, if you default for long enough on the app Klarna still passes your details on to the debt collection agency.
“There’s one more risk on top of the others, too. While Klarna isn’t reporting things to credit reference agencies, the payments are still appearing on your bank statements. Increasingly, firms are using either open banking or even just asking to see a few months’ worth of past statements when making decisions to lend – especially in the case of mortgages.
“A Klarna habit is perfectly visible to them, and it’s far from clear how they will react to it.”
A useful tool for consumers
Despite some negative reaction from the industry, many still believe that BNPL services are a good thing for consumers and can help them stay out of the debt that credit cards can bring.
Charlie Youakim CEO and Co-Founder of Sezzle, said: “With Buy Now, Pay Later, customers are able to make purchases without incurring the fees and interest that credit cards bring. So long as payments are made on time every two weeks (or whatever is required by the provider), the customer saves all the stress and extra funds that traditional credit often brings. The high interest and fees that credit holds can often present a steep learning curve for new users to the credit world.
“With a credit card, you can continue to overextend beyond your means and potentially reach life-changing levels of debt. BNPL promotes safe spending by guard-railing shoppers; for instance, with Sezzle, the company I lead, a user cannot complete an additional purchase if they have a failed transaction on a previous order. In doing so, BNPL offers a safe and transparent approach to credit –it’s a responsible form of training wheels to enter the credit world. Not only does it help in saving money, but in promoting financial independence and empowerment.”
Yishay Trif, CEO of international payments fintech, Moneynetint, agrees and believes that BNPL services are an example of how fintech’s are making consumers and businesses more engaged with their money.
“They are more switched on about what’s possible, and they expect their financial services providers to make their money – and their credit – work as hard as possible.
“BNPL is a really interesting example of how fintech is reimagining what’s possible with money. By taking advantage of consumers’ hard-earned credit to spread payments over time, BNPL squeezes the maximum value and utility out of consumers’ lines of credit. Used responsibly, BNPL can be an important, much-needed stimulus for the world economy, providing the facility to bring more people into the market and leaving fewer priced out.”