Ceri Plowman

Written by:

Ceri Plowman

Senior Manager

Frictionless payments - millennial money and the rise of a buy now, pay later culture

  • May 2019
  • 5 minutes

This year has seen the rise of frictionless payment platforms offering ‘buy now pay later’ customer credit. Big players in the market include Klarna, Afterpay and Quadpay – all of which are being adopted by online retailers with a millennial clientele including ASOS, Urban Outfitters, Topshop and H&M.

So, what are frictionless payment systems? Frictionless commerce is a method of using data from devices, apps and websites to integrate buying opportunities and make them as simple and seamless as possible. Yet these brands go one step further with their frictionless offering by delaying payment for up to 30 days enticing customers to spend more.

Taking Klarna as an example (with over 4.4m users in the UK since its launch in January 2019), it allows customers to pay for purchases up to 30 days later using a variety of payment options including: pay later – 14 or 30 days after delivery; payment over three monthly instalments, or for larger purchases, payment over up to 36 monthly instalments. 

How does it work?

Customers simply select the Klarna payment option at checkout and complete what the company terms a 'soft' credit check. Following this, the customer is presented with several delayed payment options. With a user-friendly interface and no fees or interest charges, the customer perceives this as a safer alternative to a credit card. There is no interest, late fees or charges for the customer, although non-payment for several months can end up with debt collection agencies.

Klarna generates revenue by charging fees on transactions via their retail partners, but they also take on the risk so that retailers receive payment regardless. Looks like winners all round then?  

Fuelling the returns culture

Recent trends have seen a surge in over-ordering and intentional returns with up to one in three items being returned - this looks set to continue to increase in the future. Klarna exacerbates the situation by allowing customers to 'try before you buy' whereby customers can return a purchase before the money even leaves their account. 

Retailers should be prepared to adapt their returns process to make this easier for customers – and to maintain control over their own handling costs. A 28-day delay between delivery and payment removes one of the barriers to purchase and could see more frequent purchases if the consumers don’t have to wait for pay-day before buying in bulk. However, with access to the product being that much easier, this should indicate an overall increase in sales.

There’s an argument that this 'try before you buy' culture could go even further with couriers being made to wait whilst customers try on their purchases.

From online to in store

Klarna have announced that they will be rolling out their payment options across several physical retail stores. Retailers simply provide a QR code that the customer scans using their Klarna app, and then completes the payment using their phones. Not only does this add flexibility to the check-out process but it also speeds things up.

The app allows customers to track their outstanding payments from different retailers in one place and see exactly when the payments are due. Although in reality this isn’t that different to using a credit card and paying it off every month, the sleekness of the app makes it very easy to use and doesn’t come with the same stigma as a credit card. 

Future – a cashless society?

The rapid growth of alternative payment options such as Klarna show that flexibility is really what the younger generation is looking for. More and more retailers are signing up and offering Klarna as a payment option, and once adopted have seen their consumer base grow and expand. 

With younger consumers coming to expect a range of purchase options that are more convenient for them, and their growing reliance on smart phones for payment, does this mean that cash, and to some extent card payments are set to become a thing of the past?

A cautionary tale

The flexibility in payment that these apps offer feeds into the current collective 'want it now' consumer psyche – encouraging consumers to spend, rather than save. Splitting a payment into three can make products appear more affordable than they are or encourage consumers to add another item or two to their basket. Does this mean they are overestimating what they can actually afford? Whilst Klarna and the like offer the potential for sales boosts for retailers, they also shift us closer to a credit-based society. With easy access to debt, it begs the question whether these platforms are too readily available, especially to a younger generation?