The pandemic brought about an e-commerce retail boom, and with it has also come an explosion in the popularity of Buy Now, Pay Later (BNPL) services.
Last month, Swedish fintech heavyweight Klarna cemented its position as arguably the greatest giant in the space by confirming a new equity funding of just over £453 million – giving the 16-year-old company a value of around £32.33 billion, and making the BNPL business the highest-valued private fintech corporation in Europe.
With the rise of BNPL services intrinsically linked to online shopping, will their popularity continue as the world opens up, and shoppers return to bricks and mortar retail stores?
Buy Now, Pay Later options are expanding beyond online shopping only
We shouldn’t expect online shopping to slow down as physical retail stores reopen, says Philip Belamant, CEO and founder of Zilch, a London-based startup which offers consumers more flexible ways to pay. He explains, “Fundamentally, consumers are driven by convenience, and will choose to shop and pay in ways that are easiest for them. While we saw Gen-Z and Millennial customers, in particular, shop online even before the pandemic, e-commerce has become part of the everyday lives of consumers across generational divides. This behaviour won’t drastically change as shops open up.”
Though BNPL services have thrived with the rise of ecommerce, BNPL is also increasingly part of the in-store shopping, experience too, adds Belamant, “In fact, at Zilch we launched the first way to Tap & Pay-over-time in the UK, so our customers can tap in-store and instantly spread the repayments over 6 weeks.”
Alex Marsh, Head of Klarna UK, has seen the same omnichannel trend crossing both physical and online stores: “We expect consumers to maintain a strong appetite for BNPL for their everyday purchases both online and offline as life gets back to normal. Indeed, with shoppers returning to physical stores, we’ve already seen a rise in the number of retailers choosing to integrate Klarna in-store.”
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The benefits of Buy Now, Pay Later
The rise of Buy Now, Pay Later schemes has been met with criticism, not least of which because they encourage people to spend outside of their means.
Judy Vee, a human behavioural expert, calls the trend “concerning,” and refers to the services simply as “new age credit cards.” She explains, “If the past 18 months have taught us anything, it is that we are wise to focus on building financial empowerment and resilience, so that we can withstand uncertainties that we now know can happen, at least financially.”
But, the retail payment option provides some clear advantages for shoppers in comparison to traditional credit cards.
Klarna UK’s Alex Marsh explains, “BNPL is a better and more sustainable way for consumers to use credit when they need it. BNPL enables consumers to spread the cost of a purchase with no interest and in the case of Klarna, no fees. This means that consumers only ever owe the original cost of the product.”
“Capital Economics estimated that if all BNPL purchases in 2020 had been made on credit cards instead, it could have cost consumers £76 million in interest charges alone,” adds Marsh.
In comparison, “The credit card business model relies on customers not being able to repay on time so that they can charge you interest and fees,” explains Zilch’s Belamant.
“On the other hand, BNPL providers are creating transparency in a previously complex industry with structured repayment plans, zero interest and no hidden fees. Unlike traditional credit cards, the BNPL model relies on customers paying on time, every time as there is no financial benefit for customers to be late,” Belemant adds.
Belamant clarifies that credit card and BNPL business models have one crucial difference: “The business model for BNPL relies on users being able to repay what they borrow. Unlike traditional credit card providers that make money on late fees and interest, at Zilch we only make a profit if our customers repay on time, every time.”
BNPL schemes also open up options to pay for items later to consumers who previously couldn’t access credit cards, says Belamant, “It also enables those with no credit history or a thin credit file to get access to zero-interest finance responsibly so they can better manage their cash flow.”
Younger generations are turning to BNPL services to manage their finances
“Younger generations won’t just accept the status quo and get a credit card simply because their parents did – they want better tools and deals that work for them,” explains Zilch CEO Belamant, “Gen-Z and Millennials are driving innovation across financial technology, looking for the best and most convenient way to manage their finances – this isn’t going to stop – and BNPL is one solution they’re turning to for more personalised lending.”
Klarna UK’s Marsh has seen the same trend: “According to Capital Economics’ report ‘BNPL and The New Economic Landscape’ commissioned by Klarna, around two thirds of those who used BNPL to make an online payment last year said that the flexibility helps them manage their finances. The report also found that according to 78% of users, flexible returns and security when buying from unknown sellers were important in their decision to use BNPL in their online purchases.”
However, Judy Vee argues that consumers would do better to manage their finances with new tech which encourages saving rather than spending, saying “Personally, I would rather see app innovations which encourage saving and growing wealth, rather than apps which encourage spending above your means.”
While controversial, it seems BNPL schemes are set to become an ever-present fixture on the retail landscape – and can offer a better alternative to credit cards for many consumers.