Buy now pay later – the next credit bubble to pop?

According to the New York Times, the popularity of Klarna is how simple it appears “most purchases are approved in less than a second. Klarna makes money by taking a small percentage on each transaction from retailers, and it offers customers instalment plans, which charge interest, on their online purchases”.

Klarna was born in 2005 and is not alone in the marketplace, joined by the likes of Afterpay Touch Group Limited and Laybuy.

Essentially, the consumer who most probably cannot afford the goods at the time of sale, is offered the opportunity to pay by way of instalments, delay payment for 30 days or enter a “one-time credit agreement”.

Klarna underwrites the risk and then collects the monies due from the consumer. Seemingly effortless, the consumer is given the freedom to pay on their chosen terms whilst receiving the goods as if paid for in full at the time of purchase.

The Guardian describes Klarna as the “‘buy now, pay later’ system that is seducing millennials” but what happens when the relationship goes sour? The issues now cited with these seemingly “transparent credit” providers are on the increase.

According to the Guardian, “Klarna is open about the fact that non-payment will affect a customer’s credit score and admits accounts are passed to debt collection agencies if unpaid after several months “as a last resort”.

The Mirror cites comparison website Compare The Market which asked 2,000 adults how often they use buy now, pay later schemes and the findings were concerning.

“One in five, equivalent to 10million people in the UK, said at least once in the past year.”

It said that “as many as two million UK adults who have used the payment options have had their credit scores damaged as a result of falling into arrears.”

Whilst some consumers are naive to the risks of non-payment, it could be argued that others are not adequately informed of the risks at the time of the transaction. Done online, it’s unlikely that the consumer will read the full terms and conditions when their shopping basket is brimming with goods only a click away.

Another side effect of these services is the likely impact they will have on footfall on the high street and in turn high street spending. Store cards were once a popular form of credit, however, they often commanded a high rate of interest on purchases and tied the consumer to a single brand.

Klarna et al. are online services and if consumers are keen to use them, customers are unlikely to head to high street to make purchases in future preferring to shop online.

The markets for “buy now pay later” are thriving and consumers seem enthused. However, what remains to be seen is if these services are sustainable and the longer-term impact on the UK’s credit landscape.

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