Oct 20, 20221 min read

BNPL is healthier than rip-off credit cards, even for food.

by Alex Marsh

Last week’s news that Deliveroo offers payment through Klarna sparked a surprisingly intense debate about using credit to buy food. As consumers feel the financial strain of surging interest rates and rising pressure on household budgets, this is an important discussion.

The truth is people have been paying for groceries and takeaways with credit cards and overdrafts for decades. According to our research, 1 in 5 Brits pay for takeaways on a credit card, and 44% of credit card customers have paid interest or fees on top. According to the very latest research from Experian, quoted here in Money.co.uk, a third of credit card customers are now falling behind, only making the minimum payment every month. Experian calls this group ‘Hardcore Revolvers’ and they pay extortionate fees and sky-high interest rates to the credit card companies. They are without doubt the credit card companies’ most profitable customers. Without them, if everyone paid their bills on time, the credit card companies would go out of business.

Expensive credit cards shouldn’t be the only option.

Managing cashflow is one of the principal reasons consumers turn to credit – a reality which many more are facing in the current climate. However, this shouldn’t come with the risk of expensive and inflexible interest payments and of course it is vital to protect people from over-stretching themselves. BNPL provides consumers with an interest- and, in Klarna’s case, fee-free alternative which means they will only ever owe the cost of their original purchase and, importantly, each time you use BNPL products the provider will check whether you can afford to make the purchase.

Critics argue that it is ‘inappropriate’ to pay for food or in this case a takeaway on BNPL. That if you can’t afford to pay for it outright, you should settle for a baked potato and get back in your box. How dare they? If you’re on a tight budget and decide to put on a treat for the family, why should your only option be a high interest credit card? Maybe relatives turn up unexpectedly and you want to give them a meal but can’t face cooking another after a hard week.

Most people, most of the time, know how to spend their monthly budget wisely. So long as the guardrails are in place to identify when it is not a good use of credit, then it is surely better that consumers can spread the cost of a purchase without paying interest or fees.

Klarna is more than BNPL.

To provide some further context, credit isn’t the only reason to offer Klarna. Klarna provides Deliveroo customers with additional choice in how they pay, regardless of whether they pay immediately or choose to pay later. Anyone using Deliveroo will see three Klarna payment options: pay in full immediately, pay in 30 days, or spread a larger payment over 3 installments paid off within 60 days. A less well known fact is that across our global business, 40% of transactions are immediate, ‘Pay Now,’ payments. Increasingly, people use Klarna as much for convenience and security as they do to access credit. When you are sitting on your sofa ordering a “cheeky Nando’s” takeaway on a Friday night, the last thing you want to do is rummage around for your debit card.

We offer consumers choice.

We believe our model of offering consumers choice, charging no interest, providing clear structured repayments and importantly making a new credit decision on every purchase leads to much better outcomes for consumers. The proof is in the pudding – not only have we saved consumers over £100m of interest and fees from using credit cards – with over 99.5% of our UK customers paying us back this means our default rate in the UK is now at its lowest ever rate, 30% – 40% lower than credit cards.

Some have raised the fact that BNPL doesn’t currently fall under the Consumer Credit Act. This is true and we have long called for greater protection for consumers through appropriate regulation of BNPL. Klarna has many years’ experience offering regulated credit, in the UK and elsewhere, and we have not waited for regulation before making a number of enhancements to our BNPL products to support consumers over the past 18 months. This has included updating our Ts&Cs to be even more transparent, making it crystal clear that our BNPL payment options are credit products, further strengthening our credit checks with open banking and introducing a complaints adjudicator.

Healthy debate over BNPL should be encouraged and the fact that it will lead to greater protections for consumers in the form of regulation is very positive. However, it is clearly better for consumers to have more low-cost credit options available to them, which avoid rip-off fees and extortionate interest of traditional credit. Ultimately, if more consumers ditch high-interest credit cards, and use interest-free buy now pay later for the occasional times they need credit, whether that is to pay for a fridge or a takeaway treat for the family, we think that’s a better world.

As James Coney, Money Editor at The Times, pointed out, “I bet credit card companies can’t believe their luck about how they manage to charge such sky-high rates of interest, late payment charges and offer hundreds of pounds of debt all at once….and yet they escape [such criticism]”.