Many of our older clients will remember Access and Barclaycard, the first credit cards in the UK. Access was launched by Lloyds, NatWest and Midland Bank (now HSBC) in October 1972.
It was marketed as ‘your flexible friend’ – and had another advertising slogan as well: Access ‘takes the waiting out of wanting.’
Credit, tick, the never-never… The idea of getting something now and paying for it later has been with us for centuries.
Recently though, there has been a sudden upsurge in BNPL – ‘buy now pay later’ – with the FT recently reporting the banks are ‘piling into’ BNPL. This is despite the risk of defaults and regulatory scrutiny, as they bid to win back younger customers, who are more comfortable with fintechs like Klarna than traditional credit cards.
“It’s no surprise that banks want a piece of the BNPL market,” said Amy Gavin, senior strategist at a fintech consultancy. “Providers that fail to operate it risk losing customers, especially millennials and Generation Z.”
Researchers at the universities of Chicago, Warwick and Nottingham estimated that the UK BNPL market grew to £5.7bn last year – more than double the figure calculated by the Financial Conduct Authority for 2020. Despite the size of the market, the banks do not expect to make money in BNPL – what they want to do is keep hold of customers.
Perhaps the best-known name in the BNPL market is the Swedish company Klarna – formerly Europe’s most valuable private tech company before its valuation tumbled in its latest funding round. The company was founded in Sweden in 2005 (interestingly, the founders entered the fledgling company for an entrepreneurship award and had almost no interest).
By 2015, the company was dubbed one of Sweden’s ‘five unicorns’ – a start-up worth a billion dollars – and by 2020, it was attracting Chinese investment, before raising $639m in a further funding round a year later, as it continued to benefit from the boom in online shopping and the demand for BNPL sparked by the pandemic.
However, it was dogged by questions about privacy, and claims that it was leading customers into ‘unsustainable debt’ – and in the latest funding round in July of this year, the company’s valuation crashed by almost 85%.
In the UK, Klarna’s two most popular products were ‘pay in 30 days’ and ‘pay in three months’. It didn’t charge interest for those products and was instead paid by a retailer fee. It also offered financing for larger purchases, which was over 6 to 36 months and, according to Klarna’s website, at an APR of up to 18.9%.
In a pandemic, and with a handy app on your phone, the attractions of ‘buy now pay later’ are obvious – and will not be diminished by the current cost of living crisis. But things still have to be paid for – and 172 years after David Copperfield, Mr Micawber is still right: ‘Annual income twenty pounds, annual expenditure nineteen nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds nought and six, result misery.”
The numbers may be bigger than when Charles Dickens was writing, but the principle will never change.