Apple and Klarna cut up credit cards

When Apple and Goldman Sachs explore a new line of business, there’s probably money in it. So the news that Goldman-backed Apple is considering adding a “buy now, pay later” feature to Apple Pay shows the financial opportunity is striking.

Using a credit card is no longer the easiest way to delay an entire retail payment, thanks to fintech companies like Affirm and Klarna. They allow buyers to pay for anything from fashions to Peloton exercise cycles, in interest-free installments. With Klarna valued at $ 45.6 billion last month, Apple is on its track.

If used wisely, Buy Now, Pay Later (BNPL) can be a smart innovation. It allows people to smooth their bills over weeks or months without paying high interest charges on credit and store cards. Retailers cover the cost of credit to encourage shoppers to spend more online or in their stores.

Considering the profits that banks and other card issuers are making, it’s time they took on such a challenge. People who clear their balances monthly don’t pay interest, but those who renew them are billed heavily: American households with credit card debt will pay average interest of $ 1,155 this year, NerdWallet estimates.

The basic idea of ​​credit cards hasn’t changed much since 1958, when Bank of America introduced the first revolving credit card (followed by Barclaycard in the UK in 1966). Since then, all kinds of extras have been added, from loyalty points to insurance and rewards, but the sliding monthly credit remains the essence.

Credit cards were once the most convenient way to make many payments, as writing a check or paying cash were the main alternatives. In the fractured US banking system, they have also made it easy for travelers to pay their restaurant and hotel bills in other states.

Technology has now changed the landscape: Debit cards have overtaken cash as a means of payment in the UK, with contactless transactions, including those on Apple Pay and Google Pay, growing rapidly during the pandemic. The downside is that the credit card smoothing function is lost: payment is usually immediate.

This is where Klarna and its competitors like Afterpay come in, as well as PayPal’s Pay in 4 (making a four-part payment over six weeks). The idea of ​​being able to make payments simply in interest-free installments is so compelling that competition intensifies quickly. Afterpay shares fell sharply this week when PayPal announced it would offer Pay in 4 in Australia.

The idea works best for expensive products – the kind of household items that were traditionally paid for in installments, or in the United States by layaway (making small payments in a store but not picking up furniture or the washing machine. wash only when the entire bill has been paid). Peloton’s partnership with Affirm to spread payments across its $ 1,900 bikes is a modern incarnation.

The reserve is, of course, if it is used wisely. Adam Smith, the 18th century economist, observed in The wealth of nations that “the principle which encourages expenditure is the passion for present enjoyment”. Impulse buying is a powerful human instinct, encouraged by advertising and Instagram influencers used by brands such as Klarna.

Many BNPL services have been used not to spread the cost of high value items, but to purchase cheaper items. The average outstanding balance on a UK credit card was £ 1,560 in March, while Klarna says her average user balance is £ 48 – it’s used more as a debit than a credit.

Three-quarters of UK BNPL users are between 18 and 36 years old, and 90 percent of transactions have been in fashion and footwear, according to a Financial Conduct Authority study which called for regulation this year. Paying in installments makes cheap clothes look really, really cheap.

This lack of friction is exacerbated by retailers presenting deferred payment as the default option, a practice that was banned in Sweden last year. It can be easy to move from store to store, generating a rolling balance on Klarna or its rivals without keeping in mind the bill that will eventually land.

The installment payment can also turn into a credit payment if the schedule lengthens – Klarna offers credit at an APR of up to 18.9% for deferral of payments from six to 36 months, while Affirm can charge between 10 and 30%. They promise greater transparency than traditional cards, but the cost remains high.

Fintech is exciting investors, with London-based start-up Revolut now valued at $ 33 billion, but BNPL providers need to make sure unwary buyers can really afford their credit. A report for Klarna estimates that one-fifth of UK adults used such services in the year through March: As with many inventions, the trick is to take a close look at them.

Age-old credit card shortcomings mean there is plenty of room for buyers to gain from an alternative. But if and when Apple Pay Later appears on iPhones, the usual caveat applies: think before you touch.

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