There are going to be times in life where people want or need to use credit. Whether it’s because your bedroom is now a changing room and you want to try before you buy, or you are dealing with an unexpected cost like fixing a dropped phone, and much bigger life events like buying new furniture for your first home. We believe that when those events occur, it is better for people to have the option to access credit at low or no cost.
It’s fair to say that the popularity of buy now pay later (BNPL) products has grown quickly in the past couple of years and our latest research finds that 26 per cent of Brits are using it. It’s not difficult to understand why when you think about the growth of online shopping, a trend which looks set to continue post-pandemic.
The ONS reports that in January this year online sales reached a record high of 36.3%, as a percentage of all retail sales. At the same time last year, it was just 20.2%. As of May it was down to 27.3% as bricks and mortar retail increasingly opened up, but there has nevertheless been an accelerated and enduring change in consumer habits.
We recognise this at Klarna. 15 million consumers in the UK now enjoy using our products and services, and we partner with over 14,000 retailers across fashion, beauty, home and garden, electronics and many more, to offer our payment options at their online checkouts and instore.
A better alternative.
I strongly believe BNPL is a better and more sustainable way for consumers to use credit when they need it. At Klarna, we charge no interest and no fees – on our Pay in 3 instalments and Pay in 30 days products – so you never have to pay more than the price of the item you’re purchasing. This gives consumers a greater level of flexibility, allows them to financially plan better, and means they don’t get trapped in a revolving cycle of debt.
We recently asked 7,000 people why they use Klarna and three quarters said it was because we don’t charge fees when using Pay in 3 instalments and Pay in 30 days, over half described Klarna as a better alternative to a credit card, and two-thirds said they shop with Klarna as it’s a payment method they trust.
We’re proud that people trust Klarna with something as important as their finances. Our Trustpilot scores are 4.3 in contrast to the traditional banks who score on average 1.4, and we get a sixth of the complaints HSBC gets.
Our customers also let us know what they value about our service on Twitter:
Customers are protected.
We have a deep responsibility to those who use our services so we’ve invested a lot in making sure consumers are protected at every part of the journey. Every time someone makes a purchase we are clear that this is a credit product, we show our terms and conditions, and we provide a clear and simple structured repayment schedule to help consumers with managing their money.
Every single time someone tries to use our products, we perform a robust eligibility assessment which includes a soft credit check with the Credit Reference Agencies (CRAs) and we review over 180 other data points. This approach gives us a real time view of someone’s financial situation unlike credit card companies who set a credit limit annually. We only want to lend to people who can pay us back because we do not make money from missed or late payments. This saved British consumers £76million in credit card interest over last year alone.
If you miss a payment, we restrict access and our default rate is less than 1 per cent, which is much lower than credit card companies. But we will not stop there to get that number down.
On the rare occasions someone does struggle to pay, we have all sorts of support available. From the ability to pause payments for 10 days cost-free in our app, to 24/7 chat and a dedicated vulnerable customer team, we work with consumers to help them manage any issues.
We also take steps to protect customers should things go wrong with their purchase. Everyone is protected by the Klarna Buyer Protection Policy which means you have additional protection for a purchase you did not make, did not receive or which turned out to be faulty. And if customers aren’t happy with their experience, our in-house complaints procedure follows FCA Handbook guidance.
Our customers are smart.
People who use BNPL are often mischaracterised as being unable to manage their money. We think this is unfair. The truth is, the vast majority of our customers manage their finances well and are confident in doing so. Research with the CRAs shows that over 90 per cent of Klarna customers have a good credit rating.
In fact, in May we surveyed over 2,000 people in the UK and found that two thirds of BNPL users feel they are organised with money. A further two thirds felt they have a good understanding of personal finance or money management. And, 64 per cent of BNPL customers are interested in personal finance whereas only 38 per cent of those who haven’t heard of BNPL are interested in it.
We welcome regulation.
City Minister John Glen MP said, “Given that unregulated Buy Now Pay Later products are interest-free, they are inherently lower-risk than many other forms of credit and they can also be a useful tool for managing personal finances and smoothing out the cost of bigger purchases”.
We agree. In a world where banks are charging up to 49.9 per cent for an overdraft and average credit card fees are around 20 per cent, BNPL, which provides financial flexibility with no interest (or fees with Klarna), is surely a better alternative.
Nevertheless, with the growth in popularity of new products and changes in consumer behaviour, it is absolutely right that the UK Government and the FCA should look at regulation for the sector to ensure consumers are protected.
As we have said for many months now, Klarna supports proportionate regulation of the UK BNPL sector. We welcome regulation that not only protects consumers but also promotes choice, competition and innovation. These are the vital elements of a well functioning market. By focusing on consumer outcomes rather than prescriptive regulation and tick box exercises, the Government and FCA has an opportunity to create a system that continues to make low cost and low risk credit accessible to ensure consumers have a sustainable alternative to high cost credit.
As the regulatory process for BNPL moves forward, it’s worth remembering that the FCA’s Woolard Review said the UK needs more low-cost credit products. We completely agree. Klarna’s Pay in 3 instalments and Pay in 30 days are not just low cost, they’re no cost. No interest, no fees. This is the future.