Buy now, pay later — the new debt trap for millennials?
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Banks aren’t used to being described as a “dream come true”. After a decade of bailouts, mis-selling scandals and being accused of everything from mistreating small businesses to manipulating interest rates, most would be happy just to be seen as a bit boring.
But when Swedish group Klarna announced it would offer its flagship “pay later” service for UK customers of the online retailer Asos last year, it was heralded variously as “the news we’ve all been waiting for”, “literally the best thing that’s happened to us all year”, and a “godsend” that “will make payday irrelevant”.
The service is pitched as “try before you buy”. Offered online by a growing number of UK retailers including Asos, JD Sports, Topshop and Schuh, when selecting payment options at the online checkout, a pink icon appears — “pay later with Klarna”.
If shoppers click on this and are accepted, customers have up to 30 days to pay for their online order. This means they could get a stack of clothes delivered, try them on and return any they don’t like, then only pay for what they keep.
For millennials on tight budgets, this instantly removes one of the biggest obstacles to online shopping — waiting for returns to be credited. But a quick search on social media suggests the ease of accessing “pay later” services at the checkout could be tempting some young consumers to spend more than they can afford to.
“It’s taking all my willpower not to stick £70 trainers on Klarna, let it be September’s problem,” says one Twitter user.
“That pay later with Klarna is gonny get me in bad debt, I have a spending problem 😂😂,” jokes another.
The crying-with-laughter emoji is a common refrain in such posts. While young borrowers are inclined to make light of the issue, some observers worry it could become the thin end of a more serious wedge.
A decade on from the financial crisis, a new generation — some of whom were barely out of primary school during the last credit crunch — is being courted by new types of lenders who are rewriting the language of debt for the Instagram era.
Buy now — pay later
Klarna’s website for prospective employees says: “There’s no label for what we do, because no one has ever built what we will”. But underneath the millennial pink exterior, there is one rather obvious label — Klarna is a bank. You might have to look closely to find the word on its advertising material, but Klarna got its full banking licence last year. “We consider ourselves obviously a bank,” says UK general manager Luke Griffiths.
New digital payment solutions are being touted as the perfect fit for the way we now shop online. “Sit back and relax. Klarna will notify you when payment is due,” say the bullet point instructions on the Asos checkout, advising customers they can “pay 30 days after delivery”.
Customers are told no fees or interest will be charged, and that a full credit check is not required (instead, Klarna performs a “quotation search” with an external credit reference agency).
Asos has previously touted itself as a retailer that was “born on the internet”, and the same could be said for digital forms of credit such as Klarna, which offer a swift and seamless application process.
While “pay later” has been heralded as a godsend, the concept is nothing more futuristic than an invoice, or old-fashioned catalogue shopping. If customers fail to pay up after 30 days, their details could ultimately be passed to a debt collection agency.
Mr Griffiths says Klarna will “proactively go out” to any customer who has not paid their invoice over 90 days, using text alerts, emails and phone calls and can “extend the repayment period at no cost.” He added: “If we determine that they’re a vulnerable customer, then we will treat them differently as well.”
As well as “pay later”, at some retailers including Top Shop, Klarna offers a service called “Slice It”. Illustrated with a bright pink icon of a pizza slice, users can apply to Klarna to split payments over a longer period. Despite the funky language, this essentially works like a credit card, although no plastic is ever issued.
Last month, mattress start-up Casper had to stop working with Klarna after the FT pointed out that it needed a licence from the Financial Conduct Authority to broker the product.
The “Slice It” repayment plan for Casper consumers offered credit at zero per cent interest if they paid off their balance within six or 12 months, depending on the agreement.
The small print on Klarna’s website explains that an “affordability assessment” will be performed, after which “Slice It” customers will open an online account with Klarna and sign a credit agreement. The representative APR (annual percentage rate) on the “sliced” purchases is 18.9 per cent — similar to the interest charged on many store cards or credit cards.
Traditional credit card lenders are also alive to the trend. Barclaycard offers existing credit card customers the ability to “spread the cost with a 0 per cent payment plan — and relax”. Aimed at “big-ticket buys”, customers can apply online to transfer part of their balance to an “instalment plan”. A one-off fee of between 2 and 8 per cent is charged up front to spread payments over six to 24 months.
Online payments giant PayPal is marketing a new way of spreading large payments over several months. PayPal Credit is described as “like a credit card without the plastic”. Providing PayPal account holders pass a credit check and meet the minimum repayments, they can automatically receive 0 per cent interest on purchases over £150 for four months.
“If you’re planning a weekend away or fancy splashing out on a new wardrobe, PayPal Credit is the perfect way to spread the cost of those larger purchases,” its website says. A recent TV advert shows a man using the service to buy a £200 pair of trainers, as the voiceover says: “Perfect for when you need that extra bit for those, you know, essential purchases.”
After four months, an APR of 17.9 per cent is applied to any outstanding balance. The small print advises that the same APR is charged on purchases below £150, which do not qualify for the zero per cent offer.
Young people’s willingness to borrow may seem at odds with their apparent distrust of established financial companies and reputation for being risk-averse. Polling by YouGov in 2016 found that more than 85 per cent of under-35s found the idea of being in debt stressful. Nearly three-quarters of them thought their lives were “more uncertain than for previous generations”, and fewer than half agreed with the statement “I trust banks and building societies”.
But in the tradition of Silicon Valley tech companies that have reinvented everything from taxis to corner shops by giving them a new logo and an accessible app, fintech firms can make debt look like an appealing lifestyle choice.
Eventbrite, the online ticketing site, partnered with US credit provider Affirm in 2016 because, in its words, music festivals “can be spendy”.
Offering the ability to “pay later” using Affirm’s services at the checkout was a way to “give more people access to amazing live experiences”, the company said.
Klarna’s Mr Griffiths says that changing the language people use to talk about spending is a key part of the company’s strategy.
“We want to demonstrate to shoppers that we are different to traditional lenders,” he says. “We need to relate to the customer, and that’s what our brand messaging is attempting to do. They can feel an emotional attachment or relationship with Klarna.
“We think shopping and buying should be fun. It’s an emotional journey for the customer.”
Mr Griffiths says customers appreciate the effort — “that’s been reflected in the adoption of the services” — 19m people used the service at least once 2017 — “and also things like our Trust Pilot scores and responses that we get back from consumers on various social channels”.
Retailers clearly appreciate it too. Klarna generates most of its revenues through fees from the online retailers that offer its service — suggesting its services enable some customers to spend more than they otherwise would.
Klarna sells itself to online retailers with the promise of a 20 per cent increase in the frequency of purchases.
Affirm, Klarna’s US peer, has claimed that revenue per visitor increases by 10 per cent when its service is offered, even though it can be more expensive for shoppers to pay on credit.
“We didn’t expect that providing a simpler, more transparent option for shoppers would create so much upside for retailers, but the results confirm that consumers are more likely to transact when Affirm is available,” chief executive Max Levchin is quoted as saying.
If used responsibly, the new providers of credit can offer a timely and inexpensive way of borrowing money for short periods. But are shoppers tempted to spend more than they should?
“I wouldn’t say I’ve drastically started to shop more because of Klarna becoming available, but I would definitely say it’s increased the likelihood of me buying something expensive online,” one London-based student told the FT.
The student’s biggest monthly bill for the service was “probably around £150, [but] people have had way worse”. She said one friend had to use her student loan to pay off her debts after spending thousands on designer shoes and clothes.
The ease with which young customers can access credit services is a particular concern for groups like Stepchange, the debt advice charity. “Selling credit is quicker and easier than it’s ever been, but quick decision-making when it comes to credit is not necessarily a good thing,” says Peter Tutton, head of policy at Stepchange. “Credit should never be marketed as a flippant thing or something easy and convenient”
When Arrow Global, the debt purchaser, asked a group of 25 to 34 year-olds with unpaid credit card debt what interest rate they were paying on their borrowings, 28 per cent of them said they had no idea. However, the figure was even higher among older age groups.
Rewriting the rules
Ricky Knox, founder and chief executive of Tandem, the digital bank, is less worried about the risks of young people misunderstanding financial products.
“I actually think generally people have been getting more financially responsible rather than less,” he says. “Certainly if you compare it to my generation at the equivalent time — we were pretty irresponsible — I think one of the flipsides of all the overexposure, social media, information overload they have is that you’ve actually got, at some level, a savvier generation growing up.”
Mr Knox says the trend toward clearer and simpler language on financial products is a good thing. “Let’s face it, nobody is going to read the whole small print thing.” However, he stresses that lenders have a responsibility not to mislead customers in the name of “accessibility”.
More optimistic observers also hope that new technology could help to solve some of the potential problems of buying on credit.
Digital payment services come with digital payment reminders, which could be a more timely nudge than the traditional paper-based credit card statement.
Last month, Tandem launched a range of features it said would help its credit card customers “stay on top of their borrowing”. Users who fear they are overspending can temporarily reduce their credit limit using an in-app slider. The app can also aggregate data from several accounts to tell the user what they can actually afford for the rest of the month, not just how much money is on their credit card statement.
Tandem is only one of a group of companies trying to use financial data in similar ways to aid budgeting, which have been particularly popular with the same cohort of young people. Monzo, for example, has built up close to 1m customers by presenting a friendlier image than a traditional bank, but emphasises ways to keep track of spending rather than explicitly encouraging it.
“All of that is helpful if it encourages people to save, but I don’t think people are in debt just because they don’t understand how much they’re spending,” says Mr Tutton. “There are real structural issues behind it.”
However futuristic the digital technology and marketing slogans may appear, at the end of the day, the debts still have to be repaid. In the words of one Twitter user:
“😂At the time it seems harmless but when it’s the end of the month . . . different story.”
Young people and debt
Stepchange, the debt charity, says the number of young people seeking help for problem debt has been rising for several years. Almost two-thirds of people it advised in 2017 were under 40, with 14 per cent of them under the age of 24.
Some 70 per cent of under-34s regularly borrow to pay household bills and everyday living expenses, according to research the charity conducted earlier this month with Neyber, the financial wellbeing provider.
The study of 10,000 UK employees found that one-third of 25-34-year-olds were using credit cards for day-to-day borrowing — higher than any other age group.
“People use credit because it has utility,” says Mr Tutton of Stepchange. “What we object to is credit being put forward as an easy solution to problems, or to achieving a certain lifestyle . . . especially if the sell is too aggressive where the marketing looks opportunistic. Anything focused at particular groups that may be less savvy needs to be very careful.”
A separate survey by Arrow Global, the debt purchaser, suggested that a combination of high living costs, stagnant wages and social pressures were also pushing young people toward alternative forms of debt to keep up.
More than a fifth of 18-24-year-olds surveyed had a credit card balance that wasn’t settled in full every month and a similar amount said they were in debt to family or friends.
Such habits are having an impact. More than a third said debt worries had caused them to have trouble sleeping at least once; among 25-34 year-olds the figure rose to 50 per cent.
“Debt can become a worry for anyone, but can perhaps have more of an impact on the mental health of younger people than those who are more experienced in life and have dealt with a broader range of issues,” says Lee Rochford, chief executive of Arrow.
Letter in response to this article:
Online lenders should carry a health warning / From Paul Forster, Cambridge, Cambs, UK