The concept of buying ‘on credit’ is as old as commerce itself, stretching back millennia. But things have changed a lot in the last 50 years or so. What was once private and often secretive has become an accepted part of modern life. The credit card, first issued in 1950, has become a staple in billions of wallets around the world. Now, it could have a major new challenger.
As e-commerce continues to grow rapidly, and younger generations turn their back on credit card borrowing, the option to ‘buy now, pay later’ (BNPL) with just a couple of clicks has rocketed in popularity. In the UK, the value of spending with BNPL providers like Klarna or ClearPay nearly quadrupled in 2020, with one fifth of UK adults using it to shop online for items like clothing or electronics.
Buy now, pay later – how it works
BNPL allows consumers to ‘buy’ what they want immediately and split the payment over several instalments. That means the BNPL provider pays the merchant for the product and the consumer then pays back the provider, interest free, in regular intervals, typically between four and eight weeks.
In theory, it’s a win-win for all parties. Shoppers not only get to split their payments to help with budgeting, if they return an item quickly, they never have to actually pay for it at all – no more waiting for refunds. Merchants can provide consumers with a risk-free, easy-to-use credit option to boost conversion rates, while BNPL providers make money by charging each merchant a small transaction fee, much like a credit card, or charging consumers for late repayment.
Not everyone is a fan of BNPL, though. While banks must carry out certain checks on people they lend money to, BNPL often requires users to give little more than their email address. This may be highly convenient, but it comes with “significant potential for consumer harm” according to a recent review by the UK’s Financial Conduct Authority, which highlighted how easy it is for shoppers to buy more than they can afford. As a result, BNPL providers in the UK will now have to conduct more rigorous checks before lending and ensure customers are treated fairly if they are struggling to make repayments.
BNPL hits the big time
Only time will tell whether other countries follow suit and how it impacts the likes of Klarna’s eye-catching business figures. The Swedish company is now active in 17 countries and has more than 250,000 retail partners. In early March, it was valued at $31 billion (€26 billion) similar to long-established financial players like Barclays, Credit Suisse and Deutsche Bank. And it isn’t the only BNPL rising star: US rival Affirm was valued at $12 billion (€10.1 billion) when it went public in January.
Such impressive figures have forced established names in both the finance and retail industries to take note. PayPal launched its ‘Pay in 3’ service in 2020, for example, which allows shoppers to split purchases into three interest-free payments. In the UK, department store John Lewis has just announced its own BNPL option in conjunction with French bank BNP Paribas.
Banks and credit card companies, rarely the most innovative of institutions, are also slowly responding. Some, like American Express and Citigroup, have launched their own versions of BNPL, allowing customers to split large purchases interest free, but for a small fee. Visa and Mastercard have partnered with or acquired companies to grow their BNPL capabilities.
For their part, BNPL companies are also expanding. In February, Klarna announced it was launching its first consumer bank account, “bundling shopping and banking in one app”. Just a couple of weeks later, Affirm said it plans to launch its first payment card enabling users to split the cost of some in-store purchases over a certain period.
More growth, more parcels?
The effects of BNPL on logistics are currently difficult to pinpoint. Covid-19 has rapidly accelerated e-commerce adoption. Simplifying the payment process could certainly contribute to more online purchases. Both Klarna and Affirm, for example, claim they can increase conversion rates by up to approximately 40%. BNPL also makes it easier and less risky for customers to buy multiple products at once and send some back. One report says 40% of UK online retailers reported a marked increase in returns since introducing BNPL.
This trend could be just beginning. In 2020, BNPL accounted for 2.1% of global e-commerce spend, which is expected to double by 2024. Europe is the BNPL hotspot, capturing 7.4% of e-commerce spend in 2020. By 2024, this is expected to reach 13.6%.