Capital Markets Corporate

November 15, 2019

Buy now, pay later: the new frontier in fast finance


The growth of fintech has inspired innovation within the payments industry, with one of the most significant examples being the adoption of buy now, pay later (BNPL) services. Designed to delay or spread payments into more manageable chunks, many major retailers – from Marks and Spencer to Topshop and Ray Ban – now have a BNPL option.

Such is the success of this payment approach that Klarna, one of the frontrunners in the BNPL arena, has become the highest-valued private fintech company in Europe, with a 250% increase in its valuation since the beginning of 2019 alone.

But such initiatives have also attracted heavy criticism – so much so that the Financial Conduct Authority (FCA) was prompted to intervene. This week, FCA rules designed to protect consumers using BNPL credit offers officially came into force, in a move that is estimated to save consumers around £40 – £60 million a year.

Frictionless credit

One of the most common criticisms against BNPL is it encourages impulse spending. The idea of delaying spending is nothing new, with credit cards having been in common use since the 1960s. BNPL, however, represents ‘frictionless credit’, with shoppers able to postpone payments with as much ease as making a standard transaction and in some circumstances only a soft credit check, meaning those with less-than-perfect credit scores can also access these services.

By applying the classic fintech notion of disrupting the norm to make the customer experience easier and less stressful, BNPL schemes have made it all too easy to give in to instant gratification and worry about financing purchases later.

Of course, there’s no such thing as a free lunch, and shoppers who don’t pay off their BNPL purchase within the specified timeframe will be stung with high interest charges. Worryingly, half of respondents in a recent survey agreed BNPL options encourage them to spend money they don’t have, with more than a quarter experiencing financial difficulty after using such schemes.

Rebranding debt for the Instagram era

Perhaps unsurprisingly, millennials are the most likely to experience financial problems after using BNPL – something that is a common criticism of companies like Klarna. BNPL services are said to consciously target younger shoppers, who have the desire but not the finances to keep up with the latest trends and fast fashion. By rebranding debt as an appealing lifestyle choice, with accessible language and iconography – Klarna’s ‘slice it’ option, which offers payment in long-term payment instalments, is denoted by a pizza slice – BNPL schemes have reinvented debt for the Instagram era.

The media is flooded with case studies of young people who used BNPL options with destructive consequences, from the student referred to debt collection agencies to the 21-year-old who wrecked her credit score by missing payments.

The future of buy now, pay later

But BNPL schemes are a convenient form of budgeting for many that, when used correctly, offers flexibility and enables ‘essential’ purchases without having to wait until payday or apply for a credit card. It would arguably be unfair for such schemes to be stifled by negative criticism or stringent regulation because some users find it difficult to restrain their spending when using such schemes.

The future of BNPL will lie in how such firms respond to accusations of irresponsible behaviour. Klarna for example has already been vocal in emphasising the safeguards it has in place “to ensure our products are only offered to those who are able to afford it and who will be able to make repayments in a sustainable way”. A more concerted effort, however, from brands to install a brand champion in this space – whose role is to articulate the work BNPL providers are doing to safeguard consumers, particularly to the media – would help to more effectively counter negative noise.

Embracing and advocating the FCA’s changes is a key first step: significantly, one of these is providing ‘better information to consumers about BNPL offers’ that is balanced and accurately reflects the risk versus rewards.

Communications will therefore play an important role in ensuring BNPL companies not only meet regulatory requirements but demonstrate genuine responsibility and care for their customers. This could range not only from consumer-facing content on a providers’ website and the messages shoppers see when accessing BNPL options through retailers, but also social media content and media or marketing activity. Rather than a tick-box exercise, this should be seen as an opportunity for BNPL firms to excel in best practice and move the industry in a stronger, more positive direction.