It is no coincidence that Covid-19 has had a decisive influence on the increase in eCommerce in Spain. A country accustomed to face-to-face personal relationships and cash payments has had to adapt due to confinements. This adaptation to the new normality has driven a change of habits and an increase in online purchases.
This reality is demonstrated with figures: eCommerce has grown by 36% in Spain during the year 2020, the third fastest growing worldwide, according to eMarketer. If we compare it with Europe, the growth of electronic commerce has been 12.7% according to the Ecommerce Europe report.
This increase in eCommerce has been accompanied by new payment methods such as BNPL (Buy Now, Pay Later) a new type of loan for retail outlets.
Exactly what are BNPLs?
As the acronym in English indicates, buy now and pay later. The user can start enjoying their online purchases and postpone their payment. This type of payment option is found by the user on the retailer’s website at 0% interest. The user will not pay any interest or extra cost as long as he ends up paying on time. “This type of loan is financed by retailers, who pay a percentage to the companies that offer the service, since this type of financing serves as a sales accelerator”comment Alexander Dunaev, COO and co-founder of ID FinanceSpanish fintech specialized in financial services.
These new financial services are having great acceptance, mainly among millennials, since they can quickly access purchases. In the United States, the country where its use is most widespread, it is estimated that 80% of the people who resort to these deferred payments are between 19 and 34 years old. Of those who use this resource, 65% have annual incomes of less than $50,000.
What are the main differences between BNPL payments and traditional credit cards?
In a credit card, the financial entity advances money to the client (credit) and this must be settled at the beginning of the following month, on a previously established date. This credit can be repaid in installments but paying some interest. It is the client who must face these interests. On the other hand, with BNPL payments, the customer does not pay any interest for deferring the payment of their purchases. It is the retailer who assumes part of the cost of this postponement. Of course, in both cases, if the client does not meet his payment obligations on time, he must pay a commission for non-payment.
The largest European fintech dedicated to deferred loans is The Swedish company landed in Spain in mid-2020 and operates in 17 countries. In the associated stores, the customer can make purchases with Klarna, which allows three alternatives: pay at the time, buy and pay the following month (like a credit card, but without interest) or delay payment 2 or 3 months, depending on the country. There are also other options such as splitting higher payments between 3 and 36 months. In these last two cases, there may be interest. This business model has allowed Klarna to become a fintech giant. After its latest in September, the company is valued at $10.6 billion.
Companies offering these BNPL services are on the rise. For example, the Danish company Viabill has just landed in Spain, offering up to 4 interest-free installments. This company has grown by 49% in 2019 and 14% in 2020, it has 153,000 users, 4,400 associated stores and a loan portfolio of over 58 million euros.
Upon arrival in Spain, it will have to compete with some national fintechs such as Sequra, Pagantis or Wizink. The first is a payment gateway with flexible payment methods, such as BNPL, and has become one of the main players in the sector in Spain. The second operates under the ‘Pay More Later’ brand and allows online purchases in real time, and, through the use of technology, approves or not the deferment of payment depending on the user’s credit quality.
For its part, the online bank Wizink bought the fintech Aplazame in 2018 to delve into the ecommerce sector, providing solutions to users and retailers. In this case, Aplazame allows structuring the customer payment installments (up to 36) at the same time of purchase. The fintech recalculates at the moment what the final installment will be for the client and, in just one click, the user can distribute their deferred payments over time.
What is clear is that Buy Now Pay Later is the fastest growing payment trend right now. According to Worldpay 2020 Global Payments Report, “deferred payment is the fastest growing online method in the world, with an annual growth rate of 28% over the next 5 years”. Payment deferral services are expected to account for nearly 3% of global ecommerce spend in 2023.
In the end, it is an option that helps consumers to split their payments, but it is also very beneficial for retailers, since it ultimately increases spending in their stores. According to Cardify.ai, 48% of the people consulted say that, thanks to the deferment of payments, they can spend between 10%-20% more.
However, as in any trend, one must be cautious and an abuse of a solution can become a problem. In , there is already a debate about the need to regulate this type of deferred payments. There is growing concern about the increase in consumer debt in the Anglo-Saxon country. It is estimated that 5 million Britons used this payment method during the pandemic.
The debate is served, since regulatory agents want to protect the figure of the consumer, while retailers and fintech ensure that indebtedness is within normal margins. Klarna ensures that the delinquency rate of its clients is less than 1%, which would be within normal limits. “We are heading towards an ecosystem where regulators, banks and fintechs must cohabit. The regulation is positive since it not only protects the consumer but also the companies themselves by generating a framework for action. This is beneficial for everyone”, indicates Alexander Dunaev.
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