More than a year after the first nationwide lockdown, the UK economy is finally starting to reopen. It’s fair to say that it’s been a particularly tough period for all of us. We’ve had to find new ways to work, to meet with our family and friends, to exercise, shop and so much more.
Not surprisingly, there have been wide-ranging changes in consumer habits when it comes to shopping. We’ve seen the pandemic accelerate trends that were already underway, from the surge in online shopping to the ongoing shift from traditional credit cards to new flexible payment options, with Klarna playing a crucial role. And as this demand has grown, so has Klarna. We are now Europe’s largest private fintech company, operating in 19 markets right across the globe.
The growth in our sector has been so large that it has been the subject of regular debate in both the press and parliament. In fact, during last week’s House of Lords parliamentary debate on the Financial Services Bill, the Government highlighted that financial options such as “buy now, pay later” (BNPL) offered by companies like ours “are interest-free, and thus are inherently lower-risk than most other forms of borrowing”. They added that they could be “a useful part of the toolkit for managing personal finances and tackling financial exclusion”.
As Covid-19 restrictions are being lifted, with restaurants and non-essential stores reopening in England this month, we expect some of these changing consumer trends to continue into the post-pandemic world and also to play an increasingly important role in the UK retail sector and in the economic recovery of the country.
BNPL growth follows demands for flexibility online and off.
2020 was the year of online shopping. High street shops were forced to close and quickly transform their bricks-and-mortar stores into online spaces. Consumers demanded more flexibility, transparency and security when making purchases online. They also searched for better and more convenient ways to pay; they wanted to try products before paying for them, which is difficult when shopping online. And that’s in part why BNPL, and Klarna, experienced such rapid growth.
Our recent report with Capital Economics, ‘BNPL and the new economic landscape’, estimates that 10.4 million people in the UK, or a fifth of the country’s population, used a BNPL solution in 2020 to make a purchase online, spending £4.1 billion and accounting for around 4% of all online retail sales.
And while BNPL is still at an early stage of its growth path in the UK, we can already see enormous benefits for consumers. According to our research, almost two thirds of adults who have used a BNPL service thought it had helped them to manage their finances. In addition, if BNPL had not been available, a third of customers would have used other, potentially more costly, forms of credit to make their purchases. Our report estimates that consumers saved around £76 million in interest charges alone in 2020 by using BNPL instead of their credit cards!
As non-essential retail reopens, the changes in consumer payment preference won’t be limited to online. The shift away from traditional credit is here to stay as consumers get smarter when it comes to managing their finances and exploring flexible options. This presents an opportunity for merchants to ensure their physical stores also offer a more appealing shopping experience that will meet consumers’ new expectations. We have already seen a rise in the number of retailers integrating Klarna in-store, with high street giants such as Halfords, Schuh and New Look at the forefront. The benefits for both retailers and consumers will grow as BNPL grows.
The shift away from traditional credit.
Chris Woolard, the former interim chief executive at the Financial Conduct Authority, noted in the opening paragraphs of his recent review of the unsecured credit market that “credit makes economies work and has a social purpose”.
But not all credit is equal. For us at Klarna, it’s quite simple: BNPL is a better form of credit for consumers. On our Pay Later products, we don’t charge consumers any interest or fees, even in the case of a late or missed payment, and that is another reason why we expect consumers to maintain a strong appetite for BNPL. Unlike credit card companies, whose profits are built on missed payments, we have zero incentive to lend money to those who might not be able to pay it back.
This is why consumers, who reduced their outstanding credit card balance by £10bn in the UK last year, are shifting away from credit cards. When we recently surveyed 7,000 UK consumers, 73% said they use Klarna because we charge no additional fees, and half agreed that Klarna is a cheaper and better alternative to a credit card.
Naturally there have been calls for regulatory reform as this market grows. Klarna is already operating to a high standard and comfortable operating in a regulated environment: after all we are a fully licensed Swedish bank and already offer a number of regulated credit products in the UK. But we totally agree that changes in consumer financial habits and appetite have left the current regulations looking out-dated: a new framework is crucial for raising standards across the sector.
New regulations will benefit everyone.
We believe that the right regulations will be good for consumers, good for the industry and good for Klarna. In February, we welcomed the FCA’s Woolard Review into change and innovation in the unsecured credit market and have fully engaged in a process that will offer further protection to our over 14m customers and 13k retail partners in the UK.
As a leading force in global payments and retail banking, we are committed to working with the banking and financial services industry, the retail sector, the government and regulators to ensure that our customers’ best interests always come first. We would like any new regulation in the UK to be modern, proportionate and fit for purpose, reflecting both the increasingly digital nature of transactions and evolving consumer preferences at the checkout.
As the Government said: “Used properly, [BNPL products] can provide a lower-cost alternative to mainstream or high-cost credit…It is therefore essential that when [they] are brought into regulation, it is done in a way that provides robust consumer protection while ensuring that it is viable for firms to continue to offer these products”.
As part of that viability, he cautioned though against disproportionate regulation “given the short term, interest-free nature of buy now, pay later products” which could “materially impact the way in which consumers are able to access these products”.
We know that consumer expectations when it comes to payment preferences have shifted permanently, and that there will be further innovation as needs evolve. As well as working with regulators, we have a lot more to offer consumers and retailers alike in the UK building on our experience across Europe and the US. We will continue to welcome more retail partners as we strive to provide shoppers with the smoothest experience that meets their demands. The next few months are exciting for us all at Klarna, so watch this space!
Head of Klarna UK