Klarna blog offers additional context and consideration of proportionate regulation
Today, the Consumer Financial Protection Bureau (CFPB) released their highly anticipated “Buy Now, Pay Later: Market Trends and Consumer Impacts” report detailing findings on the potential benefits and risk around Buy Now, Pay Later (BNPL) consumer payments services. The report is a culmination of the agency’s nine-month inquiry into the business models and practices of the five leading providers, including Klarna, and is part of the agency’s ongoing effort to ensure the safety of the burgeoning BNPL industry for American consumers.
We at Klarna commend the CFPB’s exhaustive work in this space and applaud efforts by Director Chopra and his staff to engage with providers and foster better consumer experiences. We are pleased that the CFPB’s findings recognize the clear benefits of BNPL products over credit cards, which profit from charging consumers interest on revolving credit.
The rapid growth of the BNPL sector in the US highlighted in the report further underscores the shift that we’re seeing among consumers who are turning away from the greed-fueled practices of old banks and high-cost credit cards towards flexible and better-value payment methods like Klarna. That said, BNPL volumes are still less than 1% of credit card use in the US, and total US purchase volumes through BNPL are less than a quarter of the $120 billion that credit card companies charge Americans in annual interest and fees.
But while the report does demonstrate the clear market demand for BNPL, it is helpful to give a full view of the critical differences between interest-free BNPL and traditional forms of credit, which are fundamentally different products. When compared side by side, the positive consumer outcomes driven by BNPL prove that it is a far superior product for the American public:
- Responsible spending: Klarna has several safeguards to prevent consumers from taking on too much debt. We make a new lending decision on each transaction, so we only lend to those who can repay, and we restrict the use of our services until missed payments are fulfilled to prevent debt from accumulating. We clearly communicate the consequences of missed payments in our Ts & Cs and at checkout and have in-app budgeting tools to put people in control of their finances. The Financial Health Network found a majority of Americans – more than two-thirds – were not encouraged to spend more than they had originally planned if BNPL was offered as a payment option, compared to credit cards, which have been proven by researchers at MIT to increase “willingness-to-pay” anywhere from 50-200%.
- Interest-free: BNPLs charge zero interest, while the average credit card interest rate in America today is over 18%, prompting a shift in consumer demand, with 39% of US consumers who used BNPL in the past year saying they did it to avoid credit card interest, according to a recent Capital Economics report.
- Clear disclosures: BNPL payment schedules and amounts are clearly defined before each purchase. 99% of BNPL users said they understood the terms and conditions when using the service, according to a recent Financial Health Network poll, while less than half of credit card users said the same. 40% of credit card users who carry a balance say they don’t know the interest rate, CNBC has reported.
- Greater consumer satisfaction: In 2021, Klarna alone had 90% fewer complaints per hundred thousand users than Chase Bank over that same time. Repeat usage is a critical feature of BNPL, according to the latest report, also suggesting a strong level of consumer satisfaction and repayment history, since individuals are blocked from making additional purchases if they are late on a payment. In terms of consumer outcomes, 99% of Klarna’s lending is repaid globally and we’re proud of our ‘excellent’ trustpilot score with over 150,000 5-star reviews.
Consumers deserve access to better short-term credit options that can loosen the stranglehold of the traditional high-cost forms, including credit cards, debit overdrafts, and payday loans, especially in difficult economic times. In their report, the CFPB states that “BNPL can be a low-cost alternative to other credit products” and “imposes significantly lower direct financial costs on consumers than legacy credit products.” Regulators and lawmakers have an opportunity to empower consumers with access to less costly, more transparent credit options and to promote innovation through healthy industry competition, forcing traditional credit providers to compete for the American consumer’s business. But low-cost, low-risk, no-interest products like BNPL should not be regulated in the same fashion as high-cost credit products, which rely on consumer fees and revolving debt.
As a licensed European bank, we continue to support proportionate, risk and outcomes-based regulation of the sector, and we remain absolutely committed to ensuring consumers’ financial wellbeing and protection. We look forward to continuing our work with the CFPB, congressional committees of jurisdiction, and other stakeholders to define and develop industry guardrails that can promote mobility and choice, ultimately benefiting consumers the most.