At the time, Klarna was relatively unheard of, but the interview intrigued me at the time. It was all about an escrow style service, as people didn’t trust getting the goods online. So, Klarna built their original business around we pay the merchant and you pay us when you get the product and say you’re happy. All well and good.
It also intrigued me because, when I asked Niklas how they came up with the idea, he said:
“We had no previous banking or payment expertise. My expertise or experience came from flipping burgers at Burger King. That's all the knowledge I had when we started this business.”
From bright young things flipping burgers in Burger King, Niklas and his colleagues have created Europe's biggest FinTech unicorn , worth $10 billion. Fantastic.
There’s always a but, isn’t there?
Their original idea was to use data to generate trust and enable the exchange of goods and services on the internet.
Early on we would create a company that is like a middleman, taking on the full risk for the merchant and for the consumer of paying and delivering online goods and services. That’s the basic idea of Klarna. We pay the merchant, no matter what happens, and the consumer can pay us up to fourteen days later, once they have received and are happy with the goods.
Cool. I thought that was an escrow service but, in fact, it’s a whole new service that is now called buy now, pay later, and that market has exploded.
According to Coherent Market Insights, the global Buy Now, Pay Later platforms market is valued at over US$7billion in 2019 and is expected to reach near US$35 billion by 2027 at a CAGR of 21.2% between 2020 and 2027.
No wonder Klarna has become Europe’s most valuable FinTech firm (worth more than Revolut and Monzo combined). The app has more than 85 million users worldwide. In the UK, it has exploded, especially since COVID, with 95,000 account openings a week. According to the BBC's Moneybox, Klarna processed more than £32 billion worth of sales in the first nine months of 2020 in the UK at a pace of over a million transactions per day.
But this has created a dilemma. The original idea was safe online shopping; the emerged business model is leveraged credit for young people. In other words, you’re young, you can’t afford to buy this; it's interest free, so no worries, buy now and pay later!
The original idea was an escrow style service. Buy now, pay when you are happy with what you got. Now, it’s buy now, pay in installments. The issue is that it’s evolved from buy now, pay later to debt now, debt later. Oh, and you get reported to the credit agencies if you don't pay later.
According to comparethemarket.com:
- 15% of consumers will now use the Buy Now, Pay Later option, compared to 4% pre-lockdonw
- 35% of adults say they rely on Buy Now, Pay Later since lockdown
- 27% could not afford the purchase at the time of buying
- 19% of shoppers use this as their preferred credit choice to buy
- 54% of 18 to 24-year-olds have turned to Buy Now, Pay Later services to fund their spending since the start of lockdown
- 45% of young people who have used a Buy Now, Pay Later scheme in the last year say they have missed at least one payment
Oh, and this is an unregulated market.
A bit like Chinese P2P lending – which has now been shutdown - there is now a call to crackdown on Buy Now, Pay Later which is shortened by many to BNPL.
“My issue is that, just like with payday loans, it will be too late. It is unregulated, without controls both in product design and communications. When people have a problem – and often it actually works pretty well – there is no ombudsman you can go to, because it is unregulated. I would call for maximum speed to move this into the regulatory environment.”
And it's the reason Capital One has banned Buy Now, Pay Later on its credit cards, which is a bit ironic as aren't credit cards Buy Now, Pay Later?
The core of the debate is whether BNPL is a good or bad thing. On the one hand, it enables consumer to get goods online without waiting, and using a simple form of credit without a credit card. The downside is when young consumers (it tends to be these more than older consumers), use it as a deferred way to pay and end up in debt.
Buy Now, Pay Later or Debt Now, Debt Later.
Maybe you have a view on this. If you do, join us for the final After Dark 11FS FinTech Insiders meetup of 2020. It’s going to be a debate where Simon Taylor and Ali Paterson say BNPL is a good thing, whilst David Brear and Sharon Kimathi will argue that it’s not. It will be an interesting debate moderated by the one and only Gemma Godfrey. The meeting takes place tomorrow so sign up now.
Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, TheFinanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal's Financial News. To learn more click here...