Frictionless Payments

This year has seen the rise of frictionless payment platforms offering 'buy now pay later' customer credit. Names such as Klarna, Afterpay and Quadpay are appearing as payment options offered by popular online retailers such as ASOS, Urban Outfitters, Topshop and H&M.

So, what are frictionless payment systems? Frictionless commerce is a method of using data from digital devices, apps and websites to integrate buying opportunities and make them as simple and seamless as possible. Not only do these platforms add simplicity, they go one step further with their frictionless offering by delaying payment, effectively giving the customer up to 30 days credit, enticing customers to maybe spend more or be happy to order more than one size to ensure best fit.

Although Klarna is relatively new tech, it has gained 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.

Customers simply select the Klarna payment option at checkout and complete what the company terms a ‘soft’ credit check. The customer is then presented with several delayed payment options. With a userfriendly set up and no fees or interest, the customer perceives this as a safer alternative to a credit card. Whilst there is no interest, late fees or charges for the customer, non-payment for several months can result in the involvement of debt collection agencies.

Klarna generates revenue by charging fees to its retail partners on transactions, but they also take on the risk so that retailers receive payment regardless. Recent retail trends continue to see an increase 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 assists by allowing customers to ‘try before you buy’ where in theory the customers can return a purchase before the money leaves their account.

Retailers are striving to adapt their returns process to make this easier for customers – and to maintain control over their own handling costs. A delay between delivery and payment removes one of the barriers to purchase and could see more frequent purchases. With access to the product being that much easier, this should indicate an overall increase in sales.

From online to in store

Klarna have announced that they will be rolling out their payment options across physical retail stores. Retailers simply provide a QR code for the customer to scan using their Klarna app and then complete the payment using their phone. This adds flexibility to the checkout process and is also as quick as paying with a contactless or debit card.

The app allows customers to track their outstanding payments from different retailers in one place and see exactly when 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. We have seen how ease of use and the quality of an app can make a huge difference, Monzo being a great example.

Could the future be a cashless society? The rapid growth of alternative payment options such as Klarna shows 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 as a result are seeing their consumer base grow and expand. Consumers now expect a range of purchase options that are more convenient for them. The growing reliance on smart phones for payment suggests that along with cash, actual card payments may become a thing of the past sooner rather than later. A cautionary tale With recent media reports indicating that a quarter of British adults have no savings, 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. According to these media reports one in ten adults typically spend more than they earn. 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. Will frictionless payments exacerbate this and result in people 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?