Outtasight: the frictionless credit bonanza

We’re all familiar with how making payments for things — the literal act of exchanging money for goods and services — has got easier over time. Paying for groceries with a contactless card or a digital wallet reduces gestures and interactions for both customer and merchant. It feels physically and mentally easier, it doesn’t have the tangibility of handing over a note or even putting in a PIN number — and for large scale retailers, seconds saved at check-out can mean millions. The future of payments is that they will become ever more contextual and invisible, from your Uber-linked automatic card payment, to the Amazon Go check-out free supermarket, and beyond.

Klarna, the Swedish business which recently launched in the UK, is part of this shift. Pay Later with Klarna is popping in an increasing number of e- and m-commerce journeys. Put in your email and shipping address, and Klarna will instantly determine if you can check out, and settle up with them at a later date. No more forms to fill in, card details to input, just ‘pay later’ with Klarna.

There’s some very clever tech behind this. Klarna makes an instantaneous assessment of the credit-worthiness and legitimacy of the online shopper, and if approved, agrees to pay the merchant on your behalf, and then collect money from you (2–4 weeks later, depending on who you’re shopping with). Klarna’s tech conducts immediate credit risk analysis, and under-writes that risk. It takes a lot of friction out of spending, and in some markets they have achieved a mobile commerce completion rate of 60% — about double the industry average. That’s a compelling argument for merchants. It’s a kind of reverse-Amazon, a one-click shop where instead of aggregating the merchants, they’ve aggregated payment processes. Like most banks they make money principally from fees and lending. From merchants they typically receive a set-up fee, a monthly fee and a fee per transaction (around 1.5–3%).

UK consumers have four settlement options: Pay Now, Pay Later, Slice It in 3, and Slice It. Pay Later doesn’t cost anything, and involves only a ‘soft’ credit check, but if you miss your payment deadline, Klarna may involve a debt-collection agency, and it will impact your credit score. A good credit score is the kind of thing that ensures you get access to better financial products, broadband and phone contracts, more favourable loan terms etc.

‘Slice It’ is Klarna’s own credit line, and at 18.9% it’s a fairly typical rate for a credit card. This involves a hard credit check: the more hard checks that appear on your credit report, the greater the effect on your credit score and likelihood of getting credit in the future. Missing an instalment payment on ‘Slice It’ means you could be charged a late payment fee, may need to start paying interest of 18.9%, and have the missed payment appear on your credit record.

For shoppers, this is another way to experience the carnival of immediacy that is the UK consumer credit environment. And for younger people who buy from some of Klarna’s more high profile partners — asos, JD Sports, Top Shop, Etsy — the ability to ‘try before you buy’ is very appealing, assuming returns are processed correctly before the payment date. But this is a young audience, with relatively little financial literacy, and not much wiggle room if things go wrong. That could be quite an expensive pair of trainers you’re buying.

Klarna are far from alone in this space — arguably they are just the most innovative in taking the friction out of payments and credit. Littlewoods will give you a whole year to pay, but charge you 44.9% APR backdated over the year if you miss the payment date. Very, the fashion and homeware retailer, offer credit lines (provided by Capital One) on the same site where you come to shop. “As long as you pay the minimum payment of £5 or 7% of your balance each month, you can pay as much or as little as you want’’.

There’s a mantra here of ‘consumer choice’ and simpler payments. But what all these businesses know is that how we spend impacts what we spend. The more the act of payment and the act of consumption are linked in a person’s mind — or coupled to use the behavioural economics term — the more we feel the reality (and sometimes pain) of payment. And the opposite is true.

Try paying for your next restaurant dinner entirely in cash, and see how that feels compared to plastic. The whole concept of credit puts a reassuring distance between us and the payment moment: US academics found that students were willing to pay almost twice as much by credit card for Red Sox baseball tickets, as when they were asked to paying in cash.

The shift towards payments that are so smooth you don’t really notice them; the easy availability of credit embedded in merchant check-out processes; the narrowing of the gap between wanting something, and having it, to a few seconds online; all of these de-couple the act of buying things from the act of paying for them. Which you will have to, at some point. According to Step Change the debt charity, 38% of under 25s seeking help with debt have problems with catalogue credit (compare with payday loans at 29%); the FCA recently issued a warning about it.

What if the experience were reversed? Not ‘buy now, pay later’, but ‘pay now, enjoy later’. This has been called prospective accounting, in which consuming something you’ve already paid for can be enjoyed as if it were free. A payment for something made in the past has been de-coupled from the experience of consuming it — but in a much more positive way than credit. Ever been on an all-inclusive holiday that you paid for upfront? Didn’t those ‘free’ mojitos taste particularly good? Or checked out at a hotel that you’d paid for in advance, and been delighted to see the zero on the bill in the morning?

Paying up front means no stressing about future payment schedules, or the risk to your credit score, added interest or late payment fees. On top of that, it means you get to enjoy the pleasures of anticipation. According to Dunn and Norton, the authors of Happy Money, ‘paying now and consuming later can help us take the long view, turning us into better stewards of our own well-being.’

HyperJar is launching in Spring 2019, you can be one of the first to get the app by joining our waiting list.

Originally published at hyperjar.com on January 30, 2019.