The eCommerce BNPL Bubble Has Burst

BNPL (Buy Now Pay Later) services are popular with customers, they allow for the cost of items to be spread over a longer period with no interest or extra fees unless payments are missed.

Typically BNPL payment options are offered for more expensive purchases.

• Klarna use declined by 3% for the first time after having two negative growth months in June and July of this year.

• The UK is the 4th largest market for the BNPL platform.

• Klarna costs merchants 3.5 times more to use than other alternatives (based on the data below).

• Klarna has more market share (53%) than all of the other BNPL solutions combined.

This is the current usage of Klarna, one of the leading BNPL providers. The data shows that from June 2022 that usage has been on a downward trend (-3%) following two negative growth months since their peak. This is because the payment solution is being uninstalled across many of the top million sites (measured by traffic) across the web.

This is the current usage breakdown from all of the pay later solutions.

• 4 of the top 5 BNPL in marketshare are becoming less popular with consumers and merchants.

• 32% of the adult population in the United Kingdom have used a BNPL option to purchase a good online at some point in the past.

• Approximately 20% of adults in the United Kingdom have used a BNPL option to purchase goods online at some point in the past year.

Alex Head of Klarna UK said: “BNPL still only represents approximately 1% of total credit card transactions in the UK.”

He then continued to state “Looking beyond the past year, 32% of the adult population in the United Kingdom have used a BNPL option to purchase goods online at some point in the past, this is equivalent to 17 million people.” Further to this “Approximately 20% of adults in the United Kingdom have used a BNPL option to purchase goods online at some point in the past year. This equates to 10.4 million people.”

Klarna isn’t alone in facing this usage decline issue, several BNPL providers like Affirm, Sezzle, Laybuy and PayPal Pay in 4, (4 of the top 5 solutions in marketshare) all are becoming less popular with consumers and merchants and are experiencing negative growth.

Online retail expert Elliott Davidson had this to say about why BNPL solutions are becoming less popular “As we are heading towards a recession consumers are being a lot more cautious about their spending. They don’t want to risk being unable to pay the bill and end up having to pay extra interest that they can’t afford.”

From a merchant perspective, Elliott then went on to say “With product margins being squeezed BNPL solutions are a lot more expensive compared to regular payment providers. The extra 3% Klarna costs could be the difference in making a profit for some in these turbulent times.”

We looked into this further to give people more context from the business's perspective. One of the leading payment gateways online businesses use is called Stripe, they publicly share their pricing and it is 1.4% + 20p for UK cards. As your sales volume increase to you can normally negotiate better rates with your payment provider.

With this in mind if a customer were to make a purchase this is the payout an online retailer would receive when comparing Klarna vs Stripe. To illustrate this a product priced at £100 would mean a saving of £4 using Stripe over Klarna.

Also, another reason for merchants to uninstall the pay later solutions is due to the types of customers it is attracting. Multiple merchants have stated that their returns are higher for customers using this payment method. It is worth noting that when you refund a customer they get their full money back this leaves the merchant in a deficit for the payment provide fees like Klarna of up to 5.4% plus shipping and handling. This can soon add up and eat into net profit. Therefore it is no surprise why merchants are questioning if it is really worth it, many merchants are coming to the decision that it is not and that is why we are seeing a decline in pay later usage.

Finally, Elliott had this to say “It would be irresponsible for a business to prompt their customers to use BNPL solutions to buy a product that they can’t afford to buy outright, and in turn are encouraging them to leverage a credit facility that is unsustainable, especially considering the current economy’s trajectory.”

Unfortunately, the BNPL industry isn’t regulated like credit card companies so this means consumers don't have the same legal protections if they run into payment issues.

Klarna in particular has been in hot water recently being heavily criticized after announcing their new partnership with Deliveroo. This was all down to the fact they are offering the ability for customers to pay in 30 or pay in 3 on a minimum order of £30s in the United Kingdom. Based on an analysis of the YouGov survey of consumers, we estimate that 22% of respondents thought that it helped them a lot to manage their finances by leveraging pay-later solutions. In this case more than likely not being able to afford the purchases in the first place.

We then asked Elliott what he predicts the future holds for the pay later providers like Klarna he said “I think we will see less businesses with lower average order value (AOV) using these solutions due to business ethics and the backlash other businesses have faced when doing this. I think ideally we will see businesses with an AOV between £200 and £1,000 leveraging it. With this in mind I do think we might have seen their peak and their merchant install rates will continue to slow down.”

Method

We identified Klarna usage data using sources like BuiltWith and Klarna. We then looked at the Klarnas popularity over time, market share and top country's adoption.