Pay as you earn and the implementation of Buy Now, Pay Later (BNPL) has been a lifeline for many customers whereas for others, the lack of regulation has created difficulties. The Fintech Times held a webinar to highlight both sides of the coin, and shine a light on the areas of early paydays, mainly implemented by larger corporations working with fintechs, that have been able to do good and support their employees through times of need. Equally, the webinar looked at the success of BNPL lenders and asked what, if any, regulation was required to put them on an equal playing field with other fintechs who require AML/KYC checks.
The panel was moderated by The Fintech Times’ Chief Editor, Mark Walker. The panellists included Sarah Williams-Gardener, CEO at FinTech Wales; Alex Marsh, Head of UK, Klarna and Richard Brown, CMO at Hi55 Ventures. The webinar was split into four main points of discussion: the use of credit cards, the discussion of new technology in paytech, Buy Now, Pay Later, and the need for regulation.
Buy Now Pay Later
The webinar was kicked off by Alex Marsh discussing how Klarna became a BNPL leader in the UK. “People need that extra flexibility and that’s where we come in. Our products are interest-free and fee-free and they give that flexibility in a structured way tied to a purchase rather than open credit lines or current credit cards where people end up incurring charges and interest and end up paying more for the goods than they initially planned.”
As the webinar progressed, the evolution of BNPL and how it works was discussed. Marsh clarified that BNPL is in fact credit-based, as there has been a large misconception surrounding BNPL, in that it is not based on credit at all. However, BNPL is an interest free form of credit. “It is essentially merchant funded credit. In the same way they will pay a fee to allow their customers to use a credit card or a payment platform, they will pay a fee to Klarna, to give those who choose to use it, the flexibility to defer payments or pay in instalments.” Marsh concluded this acts as a level playing field for consumers as it gives many who did not have a chance to access lower-cost forms of credit due to high APR on a credit card, an opportunity to pay for things without excruciating interest.
“There isn’t a limit when a client uses Klarna. Each purchase is treated separately to the last, and as such assessed individually.” Continued Marsh, “They may be approved the first time but three months later they may choose to buy a different item and their circumstances have changed, in terms of how they’ve used credit elsewhere, and we can’t approve them so I think that real time kind of assessing eligibility for each transaction is one part which is really key to avoid racking up unsustainable debt.”
New Forms of Paytech
The conversation followed on from BNPL to discuss the current standing of paytech and how it has developed. The first to touch on this topic was Richard Brown of Hi55 Ventures, where payroll solutions are being created to enable people earlier access to their own money. He went on to say, “The main drivers of financial stress in the UK is customer services. There are two ways of solving this: either you extend the credit line to people, or you give people access to the money they’ve already earned. Our solution at Hi55 is a win for employees and employers. We don’t extend money that hasn’t already been earned.
“We find that in OECD countries, there’s a trillion dollars at any one point, that is owed to employees that is wrapped up in employer’s Treasury Departments. We believe in returning that liquidity to the employees can be a great boost.” Sarah Williams-Gardner echoed Brown’s views saying that the new form of paytech was not giving people money that was not already earned.
Generally, there is an idea that the younger generation are the most tech-savvy, and that older generations are more liable for falling into traps where they are left paying a lot of money in interest and build up debt. There have been suggestions in the past that Klarna was a company that has preyed on younger people who did not fully understand how finance worked. Marsh pointed out that the average age of a Klarna user was 34 – the same age of someone looking to buy their first home. He made the argument that too often consumers are treated like infants as they are expected to understand how to apply for a home but not understand how an interest and fee free repayment plan for a £70 item – it doesn’t make sense.
On the topic of age filtering customers, Williams-Gardener said, “as someone who was part of the founding team of a challenger bank, there was a perception that our audience would be in that millennial market. We were really surprised that we had such a huge take up of customers much later on in life. By the time I left Starling, our oldest customer was just shy of 90. There is a perception in the marketplace that these digital products are used by younger generations but I think this is wrong. There are people who may not be digitally native, but are digitally comfortable.”
When asked about how younger people are the ones that want immediate and early payments, Richard Brown responded by saying, “A quarter of people earning over £100,000 found that they had been caught out by a large payment between 30 day payment periods. Giving them access to their salary early, rather than forcing them into the hands of credit card providers or payday lenders, is a huge boost to their employee emotional well being.”
The Role of Credit Cards and APR
As newer forms of paytech were discussed, the panellist felt inclined to discuss the forms of paytech that preceded them and how they were appearing outdated. The main comparison point to the new paytech solutions was credit cards.
“In our last summer survey we looked at the uncertainty of credit cards.” Began Alex Marsh, “We found that people knew what credit cards were but they didn’t understand the absolute basics of what the APR on the credit card, should they not make the full payment on time. Over a quarter didn’t know what the APR was on their credit card and that’s the most basic term of that product.”
Sarah Williams-Gardner picked up on Marsh’s point about APR and how it was largely misunderstood. She referenced a Michael Sheen video in which he makes an analogy of borrowing money at a pub from a friend. Paying the money back and buying the lender a pint, has an incredibly high APR over the course of the week.
Brown responded to this by pointing out the similarities in his field of advanced salary. “We find that a lot of early wage access providers are offering a small wage access but at a small per transaction fee, and that APR often turns out to be quite large, depending on when you take the salary advance in the month. We’re trying to provide a benefit to the employer. So the employer pays for the benefit of us accessing the funding for both their deferral of payment and for us take over the the payroll, enabling the employee to have free access at every stage.”
The Need for Regulation
The webinar finished by the panellist speaking about regulation in payments, and their importance to stop consumers racking up extraordinary amounts of debt.
Alex Marsh began the conversation on regulation by echoing what had previously been discussed. “There are three parts which are super important in terms of regulation. The first is around education and transparency – do customers know everything about the product they’re using. We make these very clear unlike a credit card company which will send you a 50 page booklet once a year with Ts and Cs in size six font. This is why people do not understand APR.
“The next thing is around eligibility. The products must be offered responsibly to the right people who can afford to make payments. If a payment can’t be made, users cannot use Klarna’s service again so they do not have the opportunity to build up a balance. Instead of charging ridiculous fees, Klarna works with people to figure out a payment plan.
“The final thing is protection from harm. There will be situations where a consumer’s circumstances change and they make a complaint. We are supportive of giving people the right to go to the ombudsman to help improve their individual process.”
Early pay days regulation was also looked at as Brown said, “We provide salary access, not salary advance. We’re fundamentally a B2B product. We facilitate funding between employers and funders – all of which are regulated by the FCA, and have their own eligibility criteria for who can come on their platform. We’re taking our ESG credentials really seriously as a business, with the heart of our registered social enterprise being the heart of the employee well being story.”
Sarah Williams-Gardener concluded the webinar with some final thoughts on regulation saying, “regulation needs to put consumers at the heart.. and that comes through clarity.”