The concept of paying in instalments is nothing new. From those heady days of thumbing through the toy section of the weighty Great Universal catalogue in the Seventies or the presence of a Granada store on every high street, credit and rental models were a way for lower income households to spread the cost of the TV (or the latest tech innovation – Sodastream anyone?) over a number of monthly payments.
More recently of course short-term payment models have come in for a lot of scrutiny. Pay day lender Wonga fell into administration in 2018 when the ombudsman ruled they had mis-sold high interest products to a host of customers. Similarly, rental retailers such as Brighthouse have also attracted a lot of attention for the exorbitant interest charged on items, particularly when their retail footprint appears to target lower socio-demographic areas.
However, a more mainstream approach to spreading the cost of that ‘must-have item’ appears to be gathering incredible momentum. This time last year, I was working with a client on retail payment services in Australasia. Through the course of the research, every retailer told me the same thing; LayBuy and Afterpay were where it’s at, far and away the fastest growing services on their payment gateways. This isn’t just bluster – a quick glance at recent financial results certainly back up these bold assertions; Afterpay’s FY19 sales were up 140% yoy with active merchants also up 101%.
A year on and the UK has well and truly caught on. As an economy, we’re certainly not averse to a spot of online shopping (or indeed a line of credit!) so it’s no wonder that these two Antipodean powerhouses along with Swedish retail bank, Klarna are putting so much focus on the UK market.
Lenders maintain that the ‘buy now, pay later’ market is different to traditional retail credit model (interestingly, Klarna is the only one of the three with a retail banking licence) and that the proposition works without the burden of high interest rates being placed on the shopper. Why would retailers pay? According to the FT, Klarna claim that retail partners see a resulting 20-30% increase in basket value plus an additional 20% increase in purchase frequency. Numbers not to be sniffed at in today’s war for the wallet.
The borrower themselves is only charged for late payment (typically a fee of £6 for first default and then another £6 charge a week later) and it is retailers who are charged for the privilege of these P&L transforming numbers. LayBuy claims to charge retailers c. 4p in the pound. According to data from Australia, Afterpay commission levels (30c fixed charge plus commission) equate to a similar 4-6% levy, dependent on transaction size.
However, despite the charges, retailers appear to be falling over themselves to get involved. From pureplay digital superpowers such as ASOS, to youth focused multi-channel brands such as JD Sports right through to traditional retail stalwarts such as M&S or WH Smith, retailers, it seems, simply can’t sign up fast enough.
The claimed benefits to basket value and purchase frequency are one driver but, from my conversations down under, the bigger driver is the far that not providing access to such services simply results in lost traffic and lost sales, especially amongst budget conscious younger shoppers. Indeed in Australia these services are now so widespread amongst young Aussies, it is now estimated c. 1 in 4 people aged under 35 have used one in the past year. For shoppers, the temptation is clear; if you only have £50 to spend why buy only one outfit when you can buy three spread over instalments?!
So, as we enter a new decade, it seems as though we have yet another temptation to buy before pay day. Quite what the longer-term ramifications are both for retailers and consumers remains to be seen. For retailers the worry of course is that the lower entry price could lead to a rise in returns, the current scourge of many an online retailer. CBRE estimates that e commerce retailers see return rates of 15-30%, depending on category. Unless ‘buy now, pay later’ services can change the dial on these dynamics, the higher charges vs. credit cards coupled with the impact on free cash flow from instalments could place even more pressure on beleaguered retailers.
For consumers , and younger segments in particular, the worry is that this provides yet another source of cheap credit; a stimulus to consumption at a time where the fashion industry in particular is being urged to reduce the impact on the environment from high purchase cycles. In Australia, ASIC (the equivalent of the FCA) is pushing to have great authority over this new breed of payment providers, driven by their investigation into the category where they found 50% users claim to spend more and 1 in 6 users claim to have gone overdrawn, delayed other payments or borrowed additional money.
With 60% users in Australia aged 18-34, retailers and providers have a clear responsibility to tread carefully here (especially when the Citizens Advice Bureau claims the average 18-24 year old has a debt to income ratio of around 70%). However, in the short term at least, one expects this will be yet another situation where regulation simply cannot keep up with the pace of change around it.
The revolution has clearly well underway… just who will end up paying for it remains to be seen…