The pernicious potential of “ buy now, pay later ” financing
If awakening is considered by Generation Z to be one of its virtues, instant gratification can be its vice.
Take-out meals ordered by smartphone and delivered in minutes. Films broadcast on demand. And forget to save for a new outfit and hit the stores – buy as many as you want online, using Klarna or Affirm and their interest-free credit.
All of this may seem like flawless progress. But the new standards also create fallout: armies of buzzing mopeds ridden by poorly paid workers; a dramatic increase in the time and money spent on inactive screen entertainment; and a potentially insidious standardization of buying exactly what you want when you want it online, whether or not you have the money to buy it.
Credit innovation is accelerating, strengthening its role at the heart of consumer economies. Credit card companies, which typically charge high interest rates, remain at the heart of the business. Payday loans have exploded and disappeared as regulators sought to protect poorly paid clients from exorbitant fees from lenders. Klarna and Affirm’s “Buy Now, Pay Later” financing is the latest “everyone wins” innovation for the tech-savvy generation: short-term credit online is generally interest-free and there is little hassle in terms of credit. form. filling.
But the concept has more subtle drawbacks. There are often interest charges on anything beyond very short term credit. There can be severe penalties for missed payments. And retailer fees mean costs can be passed on indirectly.
Particularly pernicious is the tendency to never pay even the smallest item straight away, accustoming a generation to masses of low-credit purchases. (Why would you have to spread the cost of a £ 2.10 pack of Boohoo socks over several months? Still, Klarna, Clearpay, Laybuy, and Zip offer a variety of options to buy these socks now and pay for them later, from 35 pence per week.)
There is no doubt that these companies, especially Klarna, now a leader in 20 countries, are formidable start-ups. They are much more user-friendly than traditional banks. They have smart technology. And they’ve racked up an impressive record for expansion. Last year Klarna’s loans exploded, pushing its assets 55% to SKr 62 billion – although they slipped even further into the red (SKr 1.2 billion).
Whatever the pros and cons of BNPL finance, it is alarming that in many markets, including the UK, it is largely unregulated.
British policymakers have warned that will change. The Woolard Review of the Unsecured Credit Market, completed earlier this year, said there was “an urgent need to regulate all ‘buy now, pay later’ (BNPL) products.
The Financial Conduct Authority agreed and told the government there was a “strong and pressing case for regulating BNPL’s activities”. But little has happened yet. Government consultation is expected soon, but a promised FCA policy document has been delayed for three months until July.
The catch for the government is that any new regulatory initiative for innovative financial firms would undermine its broader determination to make post-Brexit Britain more of a deregulator, freed from cumbersome European bureaucracy and a champion of fintechs.
It’s a tension that companies like Klarna have seized upon. In an interview with the Financial Times last week, managing director Sebastian Siemiatkowski admitted that BNPL should be regulated, but also called on the UK, one of the Swedish company’s biggest markets, “to go through regulations and consider those that are too prescriptive ”, such as rules on know-your-customer controls, anti-money laundering and confidentiality. It would help make Britain a more attractive place to list, he suggested. The most valuable unlisted start-up in Europe is courted by several financial centers because it weighs a potential float.
BNPL companies remain immature. For investors, this means untested risks. Affirm, for example, is oddly dependent on Peloton, the currently fashionable home exercise business that accounted for nearly a third of its business from the year to last June. Credit losses for BNPL are low at the moment, but clients who regularly have to defer payments may also be the first to default when a recession hits. Investor confidence in Affirm is shaky: After floating in January, its stock price nearly tripled in a month, but has since fallen just above the float price of $ 49. For BNPL users and investors, the message should be the same: the buyer is wary.