The world of retail has been transformed since the melodies of modems became an everyday norm in the late 1990s. More recently, however, it’s not just how we shop that’s changing – it’s how we pay.
The historical dominance of debit and credit card payments is being challenged by so-called “alternative payment methods”. One of these in particular – buy-now-pay-later (BNPL) – is gaining significant traction.
BNPL schemes have risen in prominence for various reasons. On the one hand, they have spawned new entrants to the financial services sector with dizzying valuations.
On the other, they’ve attracted the attention, if not yet the ire, of regulators. In early 2021, the UK Government announced its intention to bring BNPL firms under the regulatory oversight of the Financial Conduct Authority, with similar measures in progress or under consideration around the world.
Primarily, however, their prominence is due to their rapid adoption by consumers and retailers alike, with BNPL spending in the UK set to reach £26.4 billion over the next three years. This “alternative” payment method has undoubtedly entered the mainstream.
A better form of credit?
It’s easy to understand why. A light-touch approach to eligibility checks. No interest charges. A slick payments interface designed for the mobile era. The instant gratification of buying goods now, without worrying about the bill for another payday or two. Or simply a hassle-free way to try and return goods without the process and delays involved in a refund.
For retailers, the commercial case is just as compelling. A low-cost, risk-free way of encouraging increased sales, be that through securing customers who otherwise wouldn’t buy that day or increased basket values.
Credit can play a useful and meaningful role in consumers’ lives. But credit can also cause great harm when it is unsuitable or unaffordable
Introducing BNPL payments may seem a straightforward commercial choice with little downside for the retailer. The reality, however, is anything but.
In the UK, half of Gen Z consumers (born between 1997-2012) say they’ve used BNPL schemes. It’s this group that critics believe are the most financially vulnerable.
“When we entered the market in 2014, millennial shoppers in the fashion sector were undoubtedly early adopters,” says Alex Marsh, head of Klarna UK. “Today, however, Klarna supports a much more diverse audience. The average age of a Klarna customer is 33 years, and our fastest growing segment is with customers between 40-54 years (GenX).”
Marsh contends that BNPL schemes represent a lower-cost and lower-risk form of credit for the consumer. “Credit cards are designed to keep you in debt – that’s how issuers make money, through interest payments and fees from the customer. Unlike credit cards our customers’ eligibility is rechecked with every purchase. We take our role in assessing risk seriously as a lender, which is why our default rate remains well below 1% – even during the pandemic.”
BNPL’s proponents argue that it provides a better option for consumers than credit cards, overdrafts or longer-term loans, and that short-term, fixed-instalment payment plans help them better plan and manage their finances. This view is shared by a perhaps surprising source.
“There’s nothing wrong with BNPL schemes themselves, and I’m not averse to them,” says Peter Tutton, head of policy at debt charity Stepchange. “Credit can play a useful and meaningful role in consumers’ lives. But credit can also cause great harm when it is unsuitable or unaffordable. So credit should be bought, not sold. Our concern is that when credit is sold, it is predominantly sold on the benefits, not the risks.”
Stepchange’s concerns are well-founded. Despite the promise of regulatory oversight and commitments from BNPL firms to act responsibly, there is precedent for problems.
“We’ve been here before with store cards in the mid-2000s,” continues Tutton. “Retailers went from selling clothing or shoes to selling credit, which led to many people taking out store cards when it wasn’t appropriate. Retail incentives to buy things on credit might have helped sales but were not always good value for consumers and could contribute to serious debt problems. We have to learn the lessons of the past.”
Deferred payments have simply become another lever to sell more and sell faster, without a thought for the societal and environmental costs
While retail executives focus on removing friction and delivering an ever slicker, faster customer experience, Tutton calls for moderation. “A little friction is a good thing. There’s got to be space between the decision to purchase goods, and the decision to purchase credit.”
Tutton says Stepchange urges retailers “to ensure that BNPL firms they partner with are operating to high responsible lending standards and to reduce the prominence of credit options early in the purchase journey to better protect their customers”.
A turning tide
When considering BNPL payment methods, retailers need to face up to an even more profound consideration than responsible lending – the realities of responsible consumption.
“Deferred payments have simply become another lever to sell more and sell faster, without a thought for the societal and environmental costs,” says Gemma Butler, author and co-host of the Can marketing save the planet? podcast. “And these aren’t the concerns of a vocal minority of eco-warriors. The tide is turning against the excesses of consumption and consumerism, because the science tells us overwhelmingly that how we live today is simply not sustainable. Retail executives need to pay attention, because I’ll tell you who else is – institutional investors, fund managers, analysts and boards.”
Butler agrees that BNPL schemes can play a valuable role for consumers, but argues that if exploited inappropriately, they are a symptom of something far more problematic.
“If I open a retailer’s app and I’ve got credit options in my face before I’ve even considered whether or not to purchase something, we’re looking at a symptom, not the problem,” she says. “Retailers need to confront a more existential question, because it has, quite literally, existential consequences. Should we really be selling what we’re selling, and in the way we’re selling it, in the first place?”
While this may be of little interest or comfort to an executive charged with delivering quarterly figures, improving conversion rates or boosting average basket values, “it’s a question they need to face up to, because change is happening”.
If retailers shepherd or coerce consumers into credit they either don’t need or can’t afford, the reputational fallout won’t be on the BNPL firm – it will be directed at the retailer and its peers. And if retailers fail to acknowledge their part in perpetuating over-production, over-consumption and excess, their customers, investors and other financiers will punish them.
It may not happen tomorrow, next week or next quarter, but a reckoning is coming, and putting these considerations off indefinitely is a strategy fraught with risk.