BNPL — misleading a generation?
Klarna has announced that it is laying off 10% of its employees because of cost issues. The BNPL sector has enjoyed the rise of online shopping due to the pandemic; however, the model does not seem to be sustainable in the long run. Among the reasons is the war in Ukraine, and the extremely high inflation, which all influence people’s purchasing habits. As BNPL providers make money from the sales made through their service, the profitability highly depends on the value of transactions.
Let’s take a look at the BNPL model.
The target of BNPL companies is mainly Gen Z and Millennials, who feel disillusioned with the traditional banking and credit system — a fair standpoint. Klarna promotes itself by stating that they make money off the merchants, not the customers — which seems true at first sight, but gets trickier as you read the terms. Moreover, the appeal to merchants is that implementing BNPL boosts sales, average order value, and the number of returning customers. The appeal to customers is more responsible and manageable spending. How does that match up?
The option of buying something without having to pay the total amount is triggering, especially for younger people who (in general) have a stricter and more unstable budget. This is how sales and discounts work. Even though users do have to pay the full amount in the case of BNPL, it is a problem of tomorrow — making the debt seem less serious as users have time ‘to figure it out’. Another trigger is the fact that users don’t have to think about the purchase. Before a bigger investment, people often have to save up, hence, they have time to debate the necessity and usefulness of the item. With BNPL that waiting period is out, and users can make the purchase instantly. In conclusion, the main issue with the BNPL system is that customers have a false sense of an expended budget which provokes greater purchases than they can afford. Moreover, BNPL is essentially credit disguised as a shiny new finance tool. BNPL providers offer various terms, but in each case you are obliged to pay either an interest (see Affirm’s “Simple interest and no fees”), or a late fee for missed payments (both Klarna and Afterpay charge late fees), plus it can even have an effect on your credit score — in the case of 72% US residents who have fallen behind on payments.
The result? The current #klarnashulden trend on TikTok, in which people show their account balance, often with a debt of four-digit amounts.
The trend on TikTok does not exaggerate the global phenomena.
- 15% of BNPL users had to cover their payments from other loans,
- 1 in 5 have even reduced their spending on essentials to be able to pay back their debts,
- 10% of UK customers using BNPL options, exceeded their checking accounts in that month,
- 1 in 3 US BNPL usres couldn’t pay in time for one or more payments and thus was sanctioned with a late fee.
There is no doubt about the existence of the issue. The question is rather who is responsible and what can be done?
The opinion that ‘Klarna (and other BNPL providers) is only the tool for a mean’ is essentially true, however, that does not mean they have no responsibility. The core of the issue could be solved by better educating the youth about how to handle their finances, which is the shared duty of parents and the school system. Nevertheless, a change of this size takes time, and rendering irresponsible spending more difficult can ease the problem.
Klarna is already sending frequent notifications about invoices within the app and they also carry out a comprehensive credit check for each account. As they stated they are looking into other precautionary measures:
“In relation to the current trend, we are examining how we can prepare even better information offers for this special user group, both on product use and financial responsibility.”
According to tech expert Philipp Klöckner, the app should introduce mandatory budgets, so users have to set a budget at the beginning of each month. The method could also benefit the provider, as it can pinpoint the spare money in their monthly budget, so to encourage further shopping.
Lastly, providers should definitely regulate themselves to avoid outside regulation. As the issue increases, the pressure on external regulation grows. For instance, in the UK the financial regulator FCA has now been given the power to regulate “Buy Now, Pay Later” providers. It is always better to regulate on your own terms than on someone else’s, am I right?
