Buy Now Pay Later Listening Test 2

Buy Now, Pay Later Transcript

TRANSCRIPT: I’d like to talk to you today about a type of financial arrangement called buy now, pay later or BNPL for short, and I’m going to be talking about five main points. I shall start by defining BNPL. I’ll then look at market share and the key players in the industry.  I’ll then put forward the reasons why one of these key players is so successful. After that, I’m going to discuss some of the drawbacks with this industry, and finally I shall summarise my key research findings.

So, let’s start with the definition. According to Sproson (2022), BNPL is a way of spreading the cost of your online and in some cases, in-store purchases, wherein a third-party provider pays the retailer upfront, leaving the customer to repay the provider over a number of weekly or monthly instalments. You would’ve seen these types of companies as they are now a common feature on nearly all online checkout transactions and in most of your favourite stores.

What’s interesting about BNPL is that although it is not marketed as a form of credit, with many providers describing it as an alternative payment method, mainly due to the fact that consumers are charged no interest fees, in reality, it is. Naturally there are conditions on repayment and late fees, but the major difference is that you are not required to have a hard credit check to qualify. Also, unlike other forms of credit like loans or credit cards, BNPL continues to remain unregulated at the same time as the market goes from strength to strength becoming one of the most in demand financing options in the marketplace.

I’ll now look at market share and the key players. The BNPL market has become extremely popular around the world, perhaps in part due to the coronavirus pandemic which led to more and more consumers shopping online, but most notably BNPL is hugely prevalent among countries in northern Europe. Statista (2021) report that in 2020, the market share of BNPL in domestic e-commerce payments in Sweden, Germany and Norway was at 23%, 19% and 15% respectively, with the global share increasing from 0.4% to 2.1% in just four years.

There are a number of key players in the BNPL market such as Klarna, Clearpay, Laybuy, Payl8r, Openpay, Paypal, and Zilch but for today’s lecture I’ll just discuss the top three; Klarna, Clearpay and Laybuy using data from Statista. So, I’ll start with the third largest BNPL provider called Laybuy. It is one of the fastest-growing companies with a market leading position in New Zealand and the UK. It has over 900,000 customers worldwide with approximately 500,000 in the UK. The company has had significant growth of up to 70% in 2020 to 2021 and is valued at around $442m. The second largest BNPL provider is a company called Clearpay which is a subsidiary of an Australian financial technology company called Afterpay.  Clearpay has over sixteen million customers worldwide with over two million in the UK. It has had up to 63% expansion between 2020 and 2021 and has an estimated global value of $22.4bn. So, that leads us to the biggest BNPL provider in the world: Klarna which is based in Sweden and has over 90 million users worldwide, of which eight million are in the UK. Klarna is showing significant growth and its expansion into the United States, for instance, has resulted in the value of its transactions growing by more than 160% between 2020 and 2021. Not only is Klarna the largest BNPL provider, but it is also Europe’s most valuable tech company with a valuation of, according to Forbes, $31 bn in 2021.

So, let’s take a look at ‘Klarna’ in much more detail and the reasons for its success. Perhaps the main reason attributed to Klarna’s success is knowing how to market to a younger generation. Its flexible payment options from ‘Pay in 4’ interest-free payments to ‘Pay in 30 Days’, as well as offering shoppers a huge choice of items from over 250,000 retail partners including well-known brands such as Adidas, H&M and Sephora to try before they buy, and without having to wait the usual fourteen days for a refund, all appeals greatly to Generations Y and Z, who demand to have the latest items in order to follow the most up-to-date trends as quickly as they emerge. Other initiatives such as Klarna’s Rewards Club, which offers users perks such as discounts and gift cards, could also explain why its app and website experiences two million daily transactions, which also benefit the retailers who partner with them, as using Klarna can lead to increases in a retailer’s overall revenue by 70%, purchase frequency by 45%, average order value by 41%, retail conversion by 30% that is the number of visitors to the website who buy something, and return on advertising spend by 25%, that is to say the revenue generated in comparison to every dollar spent on an advertising campaign.

I shall now turn my attention to some of the issues that have been raised with BNPL providers like Klarna. Despite there being clear advantages for the retailer, provider and consumer, there remain concerns with some aspects of BNPL providers, such as Klarna, mainly regarding the lack of protection of purchases and unclear, often concealed, key information regarding the agreements that consumers sign up to. As Sproson points out, consumers using either Klarna’s staggered payments or pay in full option will lose valuable Section 75 consumer protection, that is to say when a credit card provider must protect purchases over £100 for free, and therefore be unlikely to request a refund if the items are faulty or escalate a complaint to the Financial Ombudsman if the provider refuses to engage. Moreover, to be able to use Klarna, an email address, a billing address and a phone number are the only requirements. This often leads consumers into wrongly thinking that as no hard credit checks are carried out, then any defaulting on the loan payments, either by paying late or missing a payment completely, would not appear on their credit history. On the contrary, according to Sewraz (2020), a survey of almost 3,000 UK BNPL users revealed that one in five stated that their credit score was negatively impacted; this was indicated by their inability to obtain a mortgage or loan, and even more concerning was the 10% who were not even aware that joining a BNPL scheme could affect their credit rating. This is possibly due to the fact that BNPL providers do not actually warn their customers about the potential risks that may arise from using credit.

So, to summarise, the BNPL market is showing significant growth and popularity. It is now incredibly common to find BNPL options on most online checkouts and in most retail industries. If used responsibly, BNPL schemes can offer a low-risk, interest free method of accessing credit which can be of benefit to those consumers who are able to make the repayments on time, but simply wish to spread their purchases over a short period time to manage their finances at their convenience. However, the unregulated nature of these providers can encourage customers to buy more than they can realistically afford, potentially leading to a new level of indebtedness. Thus, with better regulation and clearer guidelines on the potential risks, Klarna and other BNPL schemes could soon force the traditional credit card into submission, with millennials and Generation Z at the forefront of this change.

Thank you.

Written by AEUK / Spoken by S. Jackson

Reference list

Forbes, (2021). Klarna’s valuation triples in six months to $31 billion, minting two new fintech billionaires [online]. Available at: https://www.forbes.com/sites/jeffkauflin/2021/03/01/klarnas-valuation-triples-in-six-months-making-cofounders-billionaires/  [Viewed 07.01.2022].

Klarna, (2021). What Is Klarna? [online]. Available at: https://www.klarna.com/us/what-is-klarna/ [Viewed 07.01.2022].

Klarna, (2021). Klarna For Business [online]. Available at: https://www.klarna.com/us/business/ [Viewed 07.01.2022].

Sewraz, R., (2020). Can shopping with Klarna, Clearpay or Laybuy hurt your credit score? [online]. Available at: https://www.which.co.uk/news/2020/01/can-shopping-with-klarna-clearpay-or-laybuy-hurt-your-credit-score/ [Viewed 10.01.2022].

Sproson, K., (2022). Buy now, pay later: how it works and what to look out for [online]. Available at: https://www.moneysavingexpert.com/loans/buy-now-pay-later/ [Viewed 07.01.2022].

Statista, (2021a). Market share of buy now, pay later (BNPL) in domestic e-commerce payments in 21 countries worldwide from 2016 to 2020 [online]. Available at: https://www.statista.com/statistics/1233850/online-bnpl-penetration-country/ [Viewed 07.01.2022].

Statista, (2021b). Biggest buy now, pay later (BNPL) providers worldwide based on gross merchandise volume (GMV) in 2020 [online]. Available at: https://www.statista.com/statistics/1255448/bnpl-providers-ranked-by-transactions/ [Viewed 07.01.2022].

Statista, (2021c). Biggest buy now, pay later (BNPL) providers worldwide based on active users as of June 2021 [online]. Available at: https://www.statista.com/statistics/1274680/bnpl-klarna-afterpay-affirm-active-users/ [Viewed 07.01.2022].