This weekend you may have read about a British bank ‘speaking out’ against buy now pay later (BNPL). While they claim to be concerned about the effect on their customers of this new way to pay, their true concern is its effect on their profits.
Credit cards are a good business for UK banks, which charged over £5bn in interest in the UK alone last year. The bank which ‘spoke out’ against BNPL this weekend, charges 34.9% interest.
The credit card model is structurally unfair. Those with higher incomes who can pay their balance off each month get to use the card for free. Those on lower incomes who cannot, get stung for 34.9% interest. It is literally taking from the poor and giving to the rich.
Actually, it is worse than that. Credit card companies charge higher interest to ‘higher-risk’ borrowers: the less able you are to pay your bill, the more you will pay. That’s why student credit cards, which are marketed enthusiastically at freshers fairs and handed out exclusively to those of university age, typically charge higher interest than other cards. This model is broken and it needs to change.
Consumers recognise this and reduced their outstanding credit card debt by £10 billion last year. Instead, they are showing a strong preference for BNPL, which charges no interest and, in Klarna’s case, no late fees.
We estimate that, by using BNPL instead of credit cards, consumers saved £76 million in interest charges last year. This is extra money in consumers’ pockets, which the banks and credit card companies see as lost revenue.
BNPL is a safer way to manage credit. Once approved for a credit card, you are given a limit of many thousands of pounds which you can blow all at once. BNPL is different: we assess each transaction against your circumstances and historical patterns of use. Consumers who do not use our services within their means are restricted from further use. You will never see a credit card company do this – after all, late-payers are their most profitable customers.
Despite what you read in the papers, BNPL is still only a small part of the giant UK consumer credit market. The total number of BNPL purchases in the UK last year is equivalent to just 2% of credit card purchases. There is still a long way to go to build a fairer credit industry for all.
Along the way, we will proudly take market share from the banks, which will hurt their profits and put more money in the consumer’s pocket. And as we do, the howls of outrage from bankers will only get louder.