It seems like the ideal solution – but could there be a dark side to instalment based purchasing?
What are ‘buy now, pay later’ fintech firms?
The concept of ‘buy now, pay later’ fintech firms is simple. Instead of paying upfront for goods such as clothes and accessories, you can purchase them in separate, often monthly, instalments or simply at a later date on interest free credit at the point of sale. Companies that offer this are seeing great success; their service is the perfect solution to buying goods without the immediate consequences. However, such firms face increasing criticism for enabling, even encouraging, impulsive and reckless spending.
Who are the major competitors in the market?
Perhaps the most familiar name in the ‘buy now, pay later’ fintech industry, Swedish startup Klarna was founded in 2005. With the option to pay later in 30 days, pay in three instalments or pay in 6-36 monthly payments, the service is flexible. It announced the launch of the now available Klarna app, which extends their service to all retailers, and not only those with whom they have deals, at the end of May this year. Klarna’s sales volume was up by 36% from 2017 in 2018. An extensive marketing campaign has helped make them a well-known name amongst young people.
However, Klarna is certainly not the only business of its kind. Vyze, founded in 2008 brings lenders and customers together on a single platform, providing an easily navigable system. Its acquisition by Mastercard in April this year, for an unknown sum, highlights the growing popularity of fintech firms of this kind, with established finance companies looking to tap into what executive vice president of global acceptance at Mastercard described as the ‘growing trend of retail financing’. The same press release that stated POS firms ‘represent a more than $1.8 trillion opportunity according to Accenture’.
Also competing are companies like Clearpay, which was purchased by Afterpay, a ‘buy now, pay later’ operating in Australia, New Zealand and the US. It was launched in the UK in June. Offering a service where the user can pay in four separate instalments, it is available in a wide range of shops, including prettylittlething.com, Urban Outfitters and JD Sports. Similarly, Laybuy, founded in New Zealand, allows you to pay in six weekly instalments and launched in the UK in March.
Why are they so popular?
The success of POS fintech companies, as suggested by their increased sales, acquisition and expansion poses the question of why they are so popular. With many of these developments happening this year, their particular success in the current climate is also worth exploring.
One explanation behind the flourishing POS industry is clever marketing, geared towards young people who are perhaps more likely to use the service. Klarna is particularly skilled at this. With a month-long ‘Shop like a Queen’ campaign featuring drag queens Violet Chachki, Naomi Smalls, Kim Chi, Aquaria and Asia O’Hara (four of whom have over one million Instagram followers) from the Emmy-winning show RuPaul’s Drag Race to advertise the Klarna app and promotional posts by social media stars like Laura Anderson from Series 4 of ITV2’s Love Island, Klarna is adept at tapping into the extensive fan bases of current reality TV shows. Its July campaign featuring rapper Snoop Dogg, and publicising his investment in the company further suggests its recognition of the power of celebrity to sell a brand. These marketing techniques might be one explanation for why ‘buy now, pay later’ services are so popular at the moment.
Companies like Clearpay are also advertised on shopping websites popular with young people such as boohoo.com, which saw 14.15 million visits in June 2019 alone and targets 16-30 year olds. Advertising the availability of ‘buy now, pay later’ services on online shops and apps is beneficial for both businesses. POS finance companies can gain mass exposure, whilst brands can encourage people to spend more on their websites. Indeed, a 2012 Forrester survey revealed that offering POS services resulted in a 32% increase in sales for companies. These would not have been made had the service not been available. In addition, platforms like Klarna and Clearpay assume all financial risk when lending to a customer, making them even more attractive to retailers, who pay a fee to make the service available. The popularity of these companies with both direct consumers and brands can therefore be, at least partially, explained by modern marketing and the benefits they offer to businesses.
Another reason for the recent success of POS fintech firms is simply their concept. Many have speculated that the 2008 financial crisis means that customers today are hesitant to use credit through traditional routes like credit cards. Thus, shoppers who want a specific item can use a potentially one-off service. This is perhaps particularly attractive to young people who want to keep up with the latest trends without having to wait to be paid, and without having to commit to a major financial institution.
It has also been pointed out that, whilst some services such as Laybuy and Clearpay do require the first instalment to be paid upon purchase, others, like Klarna, do not. This solves the problem of not being able to try an item before purchasing when shopping online. Instead, services like Klarna mean that if you are unhappy with an item you can send it back without having to go through the hassle of a refund. Additionally, it has been noted that many of these companies also offer an easy checkout experience when shopping online. Once signed up to Clearpay or Laybuy, you can simply login instead of spending a long time filling out bank details when shopping online. Klarna even provides a one-click purchase service. Whilst sites themselves do allow you to save bank details, this leaves them a lot more vulnerable than an account with a ‘buy now, pay later’ firm does.
Are there any dangers of these services?
There are a number of risks that might be associated with using ‘buy now, pay later’ services. Critics have pointed out that such companies encourage impulsive spending by tempting consumers into spending more than they can afford, with the justification that the payment will be split up. This has the potential to result in long term financial problems for people as more and more money is gradually removed from their bank account.
Being late on payments can also result in extra costs, debt and a bad credit score. On Clearpay failure to complete a payment results in a £6 charge, with another £6 if the issue is not resolved within seven days. Late fees of up to 25% of the original item purchased are also incurred, meaning debt can build up. Laybuy has a similar system, whereby you could end up being charged £12 for every late or missed payment. Klarna does not charge late fees for two of its three plans, but not paying damages your credit score. This makes it more difficult to borrow money in the future. It is also worth noting that Klarna’s ‘Slice it’ option, which allows users to pay in instalments for larger purchases over 6-36 months requires a full credit check for on time purchases as well. On ‘Slice it’ purchases, if you choose to pay the minimum payment, 18.9% interest is added on, whilst late fees do occur if you fail to pay on time under this plan.
Many of these services attempt to regulate in case these concerns, as they lose money if loans are not paid back. Clearpay, for example, stops you from further using the service in the event of a late payment. However, the possibility of spending much more money than one might intend or initially wish to do, remains. Accidentally forgetting a payment and having to pay extra fees, or even winding up in debt are also potential consequences of using these services.
‘Buy now, pay later’ firms are thus gaining in popularity, with customers and other businesses, and are becoming very successful as a result. Whether the benefits of these services outweigh the possible dangers is up to users to decide.
