Almost 15 years ago, Klarna was founded in Stockholm, Sweden with the aim of making it easier for people to shop online. Klarna pioneered the concept of ‘buy now, pay later’ (BNPL) in the Nordic e-commerce industry, giving consumers the possibility to buy products and pay later with invoice. Since then, the company has evolved and is now offering a wide range of payment solutions and features to enhance the shopping experience. Last year, Klarna launched its shopping app in the US which enables people to buy now and pay later everywhere. To date it has 1.2 million downloads – and the number is growing.
Pay later down under
Another interesting market to look at if you want to understand the rise of BNPL is Australia. Let’s head down under to understand what’s going on.
The Australian market is a full-blown testbed for the booming trend. When the field was reviewed by the national regulator ASIC last year, six players were identified. And soon, Europe’s highest valued non-listed fintech (yes, that’s Klarna) is heading south, joining forces with Commonwealth Bank, one of Australia’s Big Four banks.
So why this growth-on-steroids* of buy now, pay later services? The ASIC report is rich material for any retailer looking to understand the phenomenon. Key takeaways:
- 60% of users are young, aged 18–34 years
- 55% of users reported they are spending more than they did before the BNPL era
- 81% of users agreed that BNPL allowed them to buy more expensive items
- 1/3 of users reported not having any other credit facility
In short: this is THE method preferred by millennials, the hard-to-reach consumer group born roughly between 1980 and 2000. A group which is wary of the credit card industry and which has, it seems, limited patience with unsmoooth user interfaces. But although they have truly embraced this payment channel in their cash-strapped twenties and thirties, the question is whether the romance will live on as millennials become more financially established.
Recent research showed almost 1 in 3 Australians have used a BNPL service. The data also suggested BNPL users were more averse towards credit.
On the same note, ME Banks chief executive Jamie McPhee said in an interview that the arrival of ‘buy now, pay later’ has fundamentally disrupted the payment market. Consequently, the bank decided to stop investing in its new credit card platform.
“I don’t think my daughters will ever own a credit card. They will have a debit card and a buy now, pay later account,” he said.
The irony is, of course, that paying later with interest-free installments is simply a new way of spreading the cost over time – just not via a credit card.
“It’s a fundamental economic shift,” Jamie McPhee said. “All I am doing is looking at the trend, and the trend is debit cards up, credit cards down and buy now, pay later up”.
Millennials don’t do credit cards
This rings true with US millennials as well. A survey in 2016 by Princeton Survey Research Associates International showed that 67 percent of American millennials (aged 18 to 29) didn’t carry a credit card. A similar survey two years earlier had recorded 63 percent of the same age group without a credit card to their name. So yes, the trend is real. What to do with it?
In a recent video, NYU Stern School of Business Professor Scott Galloway explains in depth how – and why – US retailers are making use of new flexible payment solutions offered by buy now, pay later companies. “[Klarna, Affirm and Afterpay] have been explicit in targeting young professionals without credit cards,” he says, pointing out a few key factors which have contributed to their success:
- Half of today’s 30-year-olds make less than their parents did at their age. Hence 3 out of 5 millennials say they are interested in installments for large purchases.
- The psychological effect. Four payments of $20 feels less intimidating than $80 sitting on your card.
- Like any good disrupter, BNPL providers are savvy marketers. Klarna’s Smoooth collaboration with Snoop Dogg has been noticed.
But BNPL is not only a way of satisfying the transaction needs of these consumers. According to Scott Galloway’s data, average basket sizes go up 20–30 percent with this payment method. This is in tune with how Daniel Jensen, Vice President of Product at Klarna, has outlined the pros of paying later.
“The younger generation want this kind of simple and flexible payment solution that suits their financial situation without forcing them into one-sided credit agreements with unfair interest rates,” he said. “Offering a consumer-friendly payment method that provides an easy, short-term, no-interest solution – without requiring a formal credit agreement with these customers – is great for your business.”
Back to Scott Galloway at NYU who’s expecting credit card giants to strike back against the smart disruptors in the BNPL industry. To stay ahead they, i.e. Klarna and others, need real moats, he argues, meaning true competitive advantages that aren’t easily replicated.
“They are trading at exceptional multiples, they should be making acquisitions and massively reinvesting in the business and the relationship and turning those rivers and those puddles into real moats,” he says.
It’s safe to say that it’s not lost on anyone at Klarna that building customer loyalty and developing relationships are drivers for success – and deeper moats. The Klarna app is absolutely key here. Not only do millennials expect smoooth shopping, fun browsing and uncomplicated delivery; when the Klarna loyalty team summed up lessons learned earlier this year, the first takeaway was: nothing beats a superb shopping experience that you want to come back to over and over again. Before even considering rewards, make sure you choose a platform that’s up to the task.
The vision, according to Michael Yee, product manager for Klarna shopping, is a one-stop shopping app where each merchant has their own branding, and can push offers to consumers.
“Klarna merchants will have the benefits of a much more integrated experience overall, with better conversion, higher retention and significantly lower administration costs.”
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How does But now, pay later work?
At checkout, shoppers have the option to receive a product right away, but pay for it in smaller installments over time.
Participating merchants pay the provider 2 to 6 percent commission plus a fixed fee for every transaction.
Merchants are promised new millennial and Gen Z customers, more repeat visits and more spending.
Buy now, pay later with Klarna
…pay the full amount up to 30 days later.
…split the amount across equal, interest-free installments.
…finance it, which splits the cost of bigger purchases into as many as 36 monthly payments. Interest charges can apply.
How Klarna installments affect shopping
68% increase in average order value from shoppers paying with installments.
44% of users say they would have abandoned their purchase if installments weren’t available.
90% of shoppers were satisfied with their 4 installments experience.
85% of users say Klarna is a better experience than other online checkouts.
U.S. millennials doing more shopping online
Millennials in 2019 are making 60% of their purchases online, up from 47% in 2017.
40% of purchases are made in stores, down from 53% in 2017.
The survey of 1,002 millennials was conducted by CouponFollow, an online coupon platform.
*According to ASIC data 400,000 customers were using interest-free payment plan services in 2016, and 2 million in 2018. Revenues were reported to be up from $32 million in Q2 2016 to $78 million in Q2 2018.