This column was first published in SvD Näringsliv, in Swedish, on September 27th, 2021.
In 1958, all residents of the American city of Fresno received a letter from Bank of America, regardless of whether they were customers or not. It contained what would become the key to all modern commerce for the next 60 years.
The mailing was an experiment, and Fresno was small enough that a public fiasco could be avoided.
In the envelope was a card with the text “Bank Americard”. In one stroke, the 60,000 residents were suddenly given the opportunity to shop on credit. The credit card – in its modern form – was invented.
Since then, credit and debit cards have been a central, and relatively unthreatened, part of global payment flows. In Sweden, 97 percent of the population has a debit card and it is the dominant form of payment.
Now we see – for the first time – a real threat to the dominance of card purchases. The reason is spelled BNPL, short for buy now, pay later. Sweden is at the forefront as the world’s fourth largest country in the BNPL market in terms of transaction value.
While Klarna has been early and dominant in Sweden and parts of Europe, the BNPL market is gaining real momentum elsewhere as well. Last summer, the payment company Square announced that they would buy the Australian BNPL company Afterpay for 29 billion dollars, around 250 billion SEK. A few weeks ago Paypal bought the Japanese ditto, Paidy. The listed BNPL company Affirm has made a cooperation agreement with Amazon, and Apple is said to be building its own BNPL product together with Goldman Sachs.
The change is interesting in all parts of the value chain.
For merchants, the benefit of BNPL is not primarily to provide a credit, but to increase the average order value and reduce the number of buyers with last minute regrets. Somewhat simplified, you can say that the more and faster ways you can pay, the more purchases are made. With BNPL, the e-tailer also bypasses the credit card systems and their fees altogether, without losing sales. However, it is not completely free – even the BNPL companies may have fees.
At the same time, for individual brands, there is an opportunity for more purchase data that can be used for more precise campaigns. When purchases are made via credit card, the details of exactly which goods have been purchased disappear. With more data, brands can offer specific discounts and installment plans down to the individual product level. This is next to impossible for anyone who does not work with BNPL payments today.
For consumers, it creates the opportunity to shop in a fast and flexible way. BNPL often provides a credit to shop with, but that has been around for a long time with credit cards too. However, credit cards are not available to everyone. A 2016 survey found that only 33 percent of American 18-29 year olds had one. For them, BNPL can be a way to buy something that was previously unavailable.
The conditions surrounding the credit may differ between different ways of paying, but the fact that some consumers find it difficult to manage it seems to be similar. A survey from the US found that a third of all BNPL buyers were behind on their payments. This is exactly what Klarna states as the reason why they recently extended their payment deadline for invoice purchases to 30 days. The question is whether it is enough to curb the underlying problem. On Tiktok there are countless (admittedly joking) videos about not being able to pay their Klarna bills – and the hashtag #klarna has a whopping 36.9 million views.
There have been attempts to get around the credit card companies and their fees in the past, but it has rarely worked in practice. The BNPL structure has the potential to be the one that actually succeeds, making it the first truly credible threat to the credit card market. It poses questions to giants such as Mastercard and Visa – remain motionless in their business model, or enter the takeover battle for the BNPL companies?