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As Klarna rolls out buy now, pay later (BNPL) services in Ireland and gives positive nods towards regulation of the industry, VIXIO discusses the Swedish company's wider market strategy as it develops any time, any where instalment credit. We also assess its claims that consumers are shifting away from credit cards.
Klarna has announced that it has officially launched its BNPL service in Ireland. The service will allow consumers who use Klarna at its partner retailer online checkouts to split their purchases across an interest-free instalment plan.
In addition, the Swedish-based payments firm noted that for those that use Klarna’s app, they will also be able to “Pay in 3” (i.e., three instalments) at any online store, regardless of whether they are a Klarna retailer or not.
While Irish regulators are in the process of re-classifying “credit” under the Consumer Credit Act to incorporate BNPL arrangements, Klarna says it welcomes regulation.
Speaking to VIXIO, a Klarna spokesperson said “for over a year now we have been calling for regulation because the market has grown more complex for consumers”.
Referencing recent proposals around BNPL regulation in the UK, he said, “we would agree with the protections proposed by the government, which includes access to a Financial Ombudsman”.
The BNPL market has come a long way in a short time. When Klarna first entered the market in 2014, it effectively created the concept of BNPL, according to the company’s spokesperson, “at the time it was very simple to understand what the BNPL offer was”.
As the market has evolved, new players have entered the market with different business models, including traditional banks, which according to the Klarna spokesperson is becoming confusing for consumers: “One big difference is we don’t charge late fees, while other services cannot only include late fees but also fees for using the service.”
In September, VIXIO reported on plans by the Irish government to introduce a new bill which will include a proposal to give the Central Bank of Ireland the power to regulate all BNPL activities.
The bill seeks to implement the main recommendation of the Tutty Report of 2018 regarding personal contract plans (PCPs). This is to extend the relevant provisions of the central bank’s Consumer Protection Code to all firms that provide consumers with hire purchase/PCP agreements. This, in turn, includes “buy now, pay later” finance that firms offer to consumers.
It proposes to do this by making the central bank regulate all such firms and subject them to the Consumer Protection Code, in particular the part that requires them to assess the suitability of products for consumers and the ease with which borrowers can repay their debts to those firms on time.
The bill also aims to broaden the definition of "credit" in Part V of the Central Bank Act 1997 to resemble that in the Consumer Credit Act 1995. This will cover BNPL arrangements by stretching the term to include "deferred payments" and "other similar financial accommodation" alongside cash loans.
Competition driving market innovation
While Klarna may lay claim to the invention of BNPL (although interest-free instalment purchases and deferred payments have long been a feature of consumer credit in many markets around the world), its launch in Ireland should be seen in the wider context of growing market competition. This is not only leading to geographical expansion for firms such as Klarna, but also encouraging innovation to improve and offer new end user experiences.
Klarna regards its core business as the services it offers its merchant customers, including the integration of the Klarna button at checkout; however, a key part of its proposition to merchant customers is its ability to sell or connect them with an active consumer base.
Offering a full range of services, a seamless and frictionless payments experience becomes a vital market differentiator to attract the right kind of consumers. The more consumers use a Klarna, PayPal or other wallet/app, the more attractive they are to merchant customers. This also works in the opposite direction. If customers are unable to take advantage of BNPL because the merchant they wish to purchase from is not a merchant of their wallet provider, the proposition becomes diminished and the consumer becomes less sticky.
Klarna launched its one-time card solution in June of this year in the UK, which has since rolled out to ten other countries including Ireland. This allows app users to create a virtual card linked to their existing debit or credit card. With every purchase you are given a unique card number and payment details in the app. Once you have these details, app users can use it to checkout at any online store accepting cards.
It effectively fills in the gap so that any consumer using the Klarna app can “Pay in 3” regardless of whether the retailer is a customer of Klarna or not.
This service was made possible because the company acquired a Swedish banking licence in 2017. At the time, Klarna claimed the licence would enable it to fulfil its ambition “to provide a superior shopping experience to our consumers at the intersection of retail and banking”.
Klarna has since gone on to launch savings products in Sweden and deposit accounts in Germany. However, a by-product of this banking licence is it has been able to use its issuing capabilities to enhance its core consumer wallet/app experience.
Klarna is not alone in treading this path. The likes of PayPal, Adyen, Square, Stripe and a multitude of others are acquiring new capabilities either through investment, new licences, acquisition and partnership to improve their overall proposition and end user experience.
For example, the Square-acquired Afterpay recently announced Money by Afterpay, a money management app in Australia supported by Westpac’s banking-as-a-service proposition. Square has a US banking licence and an e-money licence in the EU and UK.
PayPal has long held a bank licence in Luxembourg and is an early example of a fintech company expanding its consumer experience through acquiring relevant licences. Among other services, it used this licence to become a full participant of the Faster Payments scheme in the UK (which at the time was restricted to banks). This enabled it to improve its wallet experience by allowing users to send money from their PayPal account back to their bank account instantly.
One potential danger for Klarna is that by offering effectively an issuing BNPL option, it could reduce the attractiveness of becoming a Klarna customer at the merchant side. If merchants get the benefit of Klarna BNPL without needing to be a customer, there is less incentive to switch.
Klarna would likely point out that its merchant services are more than just BNPL and by increasing the number of end-users using its app, it creates a more attractive proposition to merchants.
“It might look like we are cannibalising our merchant side, but actually we are improving it,” a spokesperson said.
The future unclear for credit cards
One of the claims made by Klarna is that the launch of its “fee-free alternative to high-cost credit” comes at a time when “Irish consumers shift away from credit cards”.
It is certainly true that credit card growth has stalled in recent years. According to the Central Bank of Ireland, the total number of credit card transactions declined 7 percent during 2020, while the value of transactions fell by 18 percent.
Klarna’s press release also notes that debit cards in Ireland have been growing three times faster since 2015.
However, from the available data, it would be hard to conclude that this represents a shift away from credit cards. For example, the exceptional growth of debit cards in places such as Ireland and the UK has not necessarily been at the expense of credit cards. For example, growth of contactless payments in recent years has resulted in a significant increase in the usage of cards for low-value everyday transactions. As credit cards are more typically used for one-off purchases of higher ticket items, generally debit cards will have been the main beneficiary of this trend.
The decline in credit card usage in 2020 is most likely COVID-19 related. Historically, credit card usage typically takes a significant hit during times of financial hardship. During a crisis, consumers will typically rein in their spending, while banks will often reduce their credit exposure by restricting credit to their customers. Following the financial crisis of 2009 for example, there was an 11 percent decrease in the number of credit card transactions in the UK. Similarly, in 2020, total credit card transactions fell by 20 percent. Yet, in the intervening period, there was a healthy average annual growth of 7 percent.
Nevertheless, the potential for BNPL to have an impact on the credit card market going forward is significant, particularly as the availability of BNPL becomes more common. Many existing credit cardholders already use their cards in the same way as BNPL, taking advantage of the deferred 30-day interest free period, before paying off their balance in full each month. For those that borrow using their credit card, some may find the extended buffer offered by BNPL sufficient and more appealing than revolving their credit and being charged high interest rates.
In Ireland, there is also another cost consideration. Unlike most other markets around the world, there is a credit card tax. Customers must pay an annual stamp duty of €30 for every credit card they own. Critics claim that this stamp duty not only unfairly targets credit cards, but also reduces competition in the market as customers are discouraged from owning more than one credit card. The high cost of credit card ownership in Ireland could certainly benefit the emerging BNPL market in Ireland.
According to a Klarna spokesperson: “While people are shifting away from credit cards, there are still times in their life when they need access to credit. Instead of always on credit, it is more episodic – used for single items. They know they are not going to get charged late fees, not going to get charged interest, and it will be paid off in 60 days.”
Although the extent of this shift could be disputed, there is no doubt that credit cards could become increasingly under threat from BNPL.
