This year marks 20 years since Klarna was founded; the seemingly ingenious Swedish invention has grown from an obscure financial service product to spearhead the fastest-growing market in the US. The Buy Now, Pay Later (henceforth BNPL) market is growing by approximately 233% per year, and the company is now officially headed for IPO. Young consumers, particularly Gen Z, love it for the convenience of paying and the way it breaks down large transactions into smaller and manageable (read: less scary) amounts.
The ‘Pay in 3’ format, in its raw form, is a genuinely helpful and innovative idea, making large and necessary purchases more accessible. For the first time, large items like mattresses or dishwashers can be purchased without needing to register for a credit card, and it’s a much better option than a payday loan.
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BNPL: ‘a dangerously enticing proposition’
But that convenience is precisely what makes it such a dangerously enticing proposition. BNPL services are marketed to demographic groups that are often stereotyped as spending frivolously – such as young women – and prey on their insecurities. Brands even choose pink branding to appeal more to this fashion-conscious crowd. Social media and the constant presence of personalised, targeted advertisements convince people they need to buy to be happy, and in an increasingly cashless society, the consequences are less obvious. It is now nearly impossible to buy anything without being tempted by BNPL: you can’t book a holiday, get botox or even order food without a BNPL option being waved in front of your face. Overconsumption is rife among Gen Z, with many taking to TikTok to talk about how they cured their ‘shopping addiction’ and to share and swap tips about how to have a ‘no-spend’ year. BNPL services are taking advantage of the existing overconsumption and encouraging consumers to spend without thinking about the consequences.
When recently polled, over 50% of our Frich community (1M Gen Zers) said they wouldn’t have purchased an item if there weren’t a BNPL option available, so it’s clearly sealing the deal for many e-commerce sites, who would be loath to stop working with BNPL platforms.
Lessons to learn on how to appeal to GenZ
Many even use the service without realising that they’ve signed up, or what they’ve signed up for.
Whether you agree with Klarna’s model and mission or not, instead of just writing off BNPL services, those in the finance industry can learn a great deal from why these platforms have become so popular, and what they teach us about appealing to Gen Z. For one, it’s easy to set up and to integrate with your bank, so Gen Z consumers can start paying through BNPL in a matter of minutes.
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By GlobalDataIt’s less intimidating than setting up a credit card, sounds less risky, and doesn’t have any jargon when you’re setting up your account. Platforms like Klarna have cracked the code on how to brand to Gen Z in the right way, using pink to connote a fun and easy-going brand, one that’s not scary and doesn’t have any hidden late fees.
But of course, that’s a lie: there are late fees. The obvious point for BNPL defenders is that consumers are to blame. If ‘Pay Later’ is in the tagline, then it’s your fault for not studying the consequences – you signed up for the service regardless of whether you read the small print. You will end up paying later, and it’s of little importance to the service provider whether you’re paying comfortably or out of pocket.
Lack of transparency about missed payment fees
If you have to pay late fees, the BNPL platform doesn’t care because it still gives them income; but those same late fees can seriously impact people’s credit scores. These platforms promote themselves as an alternative to credit cards, better than paying interest payments, but they obscure the downsides of missing payments. In the early days of BNPL, missed payments didn’t affect credit scores, because the platform didn’t report to credit bureaus; but this has now changed, and it’s unclear how well-informed consumers were about this change. One in five consumers now miss their BNPL payments, which harms their credit scores and only drives them to focus on immediate spending (the ‘Buy Now’ part of the deal).
Using BNPL services can be a band-aid for the financial anxiety that many Gen Zers are experiencing in the current economic climate and high cost of living, but it doesn’t actually solve the problems that buying on credit always has. If you’re really anxious about money because of the increased cost of living, step one is to consider whether you’re paying on credit out of choice or out of need. If you’re panicking, credit shouldn’t be an impulse decision – it requires careful thinking. It doesn’t set you up for good financial habits when you’re discovering where to live, how to save, and how to manage your money as an adult. What’s more, opting to use BNPL platforms in lieu of a credit card means you’re not building your credit score, which can have a negative impact later in life when you’re looking at laying down roots.
GenZ’s lack of financial literacy
Ultimately, whether you agree with BNPL or not, the root of the problem is a lack of financial literacy among Gen Z and other young consumers, making them vulnerable. Between personalised adverts and the popularity of near-daily shopping hauls on TikTok, young consumers are being constantly bombarded with requests to spend money. But with the right financial literacy tools, Gen Z can learn how to read the fine print of BNPL services and navigate the digital world without incurring damage to their credit scores.
Like it or leave it, the growth of BNPL platforms like Klarna is impressive, and there are lessons to be learned from how their growth has skyrocketed. As the Swedish-founded fintech heads for IPO, the presence of BNPL won’t be going away anytime soon, so we need to better educate Gen Z and younger generations about how to navigate the use of BNPL. Education is key to making the right decisions, and if Gen Z do choose to use a service like Klarna, they need to know what they’re getting themselves into.
Aleksandra Medin is co-founder and CPO of Frich
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