Can BNPL and responsible lending go hand-in-hand?

Buy Now Pay Later (BNPL) services are offering online shoppers a new way to pay. They are not a bank card or a store credit, BNPL services allow costumes to either pay later for their shopping or split the cost of instalment payments. 

The largest BNPL service provider in Europe is Swedish unicorn Klarna. If you are not familiar with Klarna, the company is a Swedish payment service provider that takes end-to-end responsibility for your payment. At its last count, it claimed to have 70 million customers, 190,000 retail partners and 2,500 employees. It’s present in 17 countries including the UK, Germany and other European countries. 

In the UK, Klarna has already eight million costumes and big merchants like TopShop and ASOS, among others accept Klarna. In Sweden, Klarna seems to be omnipresent. Most webshops use Klarna and you can even buy your bus tickets with it. From big to small purchases Klarna is there.

According to this BBC article, Klarna has seen a boom in business during Britain’s lockdown. The volume increase was a result of the increase of digital transactions during the lockdown with people shopping online more often.

In Australia Afterpay is the largest BNPL service provider and recently they started offering digital banking services. Afterpay launched in the Australian market five years ago and has gathered 48,000 merchants. Another player is Zip Co, and while Afterpay and Zip Co have slightly different business models, the two companies alone now have about 5.4 million customers in Australia.

Afterpay has proved popular with millennials who make quick purchases worth an average of AUD $153. The company says the average Australian customer is 34 years old.

The price of convenience

Despite BNPL growing so quickly in popularity, there have been a lot of questions about the ethics of this kind of service. Lured by the convenience of BNPL, it’s been argued that users don’t fully understand their financial contract or the service that has been offered to them, especially concerning late fees and interest ratings. Transparency, or the lack of it, has been a real issue among the BNPL providers.

For instance, Klarna has received a lot of criticism, with consumer groups and debt charities saying that Klarna is not taking their responsibility as a lender seriously. The price of online shopping convenience and the frictionless way to pay with BNPL has been one of major factors to people getting into serious debt fast.

UK’s debt charity StepChange said they are seeing a rise in the number of people seeking debt help who have outstanding buy now, pay later debts. 

Last August, Financial Counselling Australia told the ABC News, the 'buy now, pay later' model is becoming a problem for young Australians experiencing unexpected financial problems due to the COVID pandemic. They also mentioned that, even a “small amount of debt” can scale and become a real financial problem.

And it seems that the criticism towards the high retailer fees. Just last week,  Afterpay and Klarna have been exchanging blows over their different businesses

Klarna CEO Sebastian Siemiatkowski accused Afterpay of adding extortionate fees. “[I’m surprised] people are celebrating the success of some of your local players when they are charging 400 basis points [to retailers],” he told the AFR.

Afterpay fired back, with CEO Anthony Eisen calling the claims out as “disingenuous and desperate”, and went on to say, “We know exactly where they are and they are not out of kilter with us, and even if they were – why are more merchants choosing us then in the US and Australia?”

Rivalries aside, both companies are reaching 4% mark for retail fees. At the end of the day, both companies are taking a large bite out of the margins of retailers, leaving little choice for retailers if they want to offer the convenience of BNPL.

Responsible lending: who’s in charge?

Just a quick Google search will show a lot of articles with horror stories of people getting into serious debt because of the BNPL companies, alerting consumers of its dangers. 

However, it’s not yet very clear who's in charge of offering a responsible way to spend using BNPL. Would it be the companies (Klarna, Afterpay etc) themselves or each country's financial regulators? The answer is not as simple as it seems.

Addressing the lack of transparency and hidden fees in BNPL, UK startup Tymit wants to tackle the lack of transparency and control that defines traditional credit cards. 

Launched in December 2019, Tymit offers a credit card that lets customers pay in installments allowing them to avoid paying unnecessary interest by spreading their cost over 3, 6, 12 or 24 months. Tymit users can also simulate purchases before they buy and, with true costs made available up front, see how they will affect their bill. 

“When you buy something now and pay for it later, that's as good as using credit. But we're in the strange position where consumers don't see BNPL spending as 'real debt'. We have to stop pretending that it's all that different from other forms of credit, like loans and credit cards.”, explained Tymit CEO Martin Magnone.

BNPL offers a frictionless payment experience, but it makes it way too easy for consumers to make today's spending tomorrow's problem. 

In his opinion, BNPL providers have a responsibility to look out for the financial health of their customers, and “we think the FCA is moving in the right direction, because it should be regulated in the same way as other credit providers." , added Martin Magnone.