While this year’s Super Bowl featured many of the usual suspects of advertisers like Amazon, Doritos and Bud Light, a host of newcomers entered the fray. One, Klarna, the Swedish payments brand, built buzz for its quirky use of a celebrity—albeit in miniature, quadrupled form—to explain its modern day appeal to shoppers. In the spot, four tiny cowgirl Maya Rudolphs pay for a pair of sparkly boots in four small installments, illustrating Klarna’s buy now, pay later approach to payments.
Ponying up the $5.6 million needed for a 30-second Super Bowl commercial may have worked in Klarna’s favor as the 15-year-old brand tries to penetrate the U.S. market, which it entered four years ago. According to Harris Poll, Klarna got a 5.9-point boost in consideration after the spot aired. Klarna Chief Marketing Officer David Sandström says the ad’s feedback has been “fantastic,” noting that it was “showcasing to consumers and to retailers that we mean business in the U.S.”
Yet Klarna is not the only fast-growing brand with such aspirations. In recent years, a host of buy now, pay later companies have popped up across the globe, including Afterpay in Australia, and Affirm in San Francisco. Such companies offer a compelling proposition to both retailers and consumers. For merchants, offering a buy now, pay later service could attract younger consumers eager to spend but not willing to use an interest-accruing credit card that could result in more debt—particularly after watching relatives get into financial trouble during the 2008 recession. When using buy now, pay later lenders, consumers receive the item but pay for it over time, often in four installments, with no interest or late fees if paid on time. Like with credit cards, customers undergo an approval process up front at point-of-sale, before they’re able to use a buy now, pay later service, which makes money by collecting a percentage ranging from 2% to 8% for each item’s sale from the retailer.
“The idea of layaway is almost 100 years old—this is nothing new and has been around since the Great Depression,” says Sara Rathner, a travel and credit cards expert at Nerdwallet. “When something is new, or new again, there’s lots of players in the market and they’re trying to get that precious market share and profit from it but after the initial trend explodes, it’s going to be a case where certain players in the field are going to rise to the top.”
Online shopping fast-tracked the category
But there is a key difference between old-school layaway programs, and buy now, pay later that is helping to fuel its rise: Buyers take possession of the products right away. Buy now, pay later is also gaining momentum as online shopping surges in the pandemic because it offers an easy digital checkout experience. Market research firm CB Insights projects that buy now, pay later lenders in the coming years will gain a growing slice of the $8 trillion market of credit, debit and prepaid cards. The buy now, pay later industry, which generated $20 billion to $25 billion in purchases last year, will grow as much as 15 times its current volume by 2025 to exceed $1 trillion in annual gross merchandise volume.
Traditional lenders and credit card brands are confronting the threat by introducing similar services that break down payments into installments portioned out over multiple periods. But brands are using different models. For instance, American Express late last year gave more of its card holders the option to choose how they pay of their balance—including one option in which users create monthly payment plans with fixed fees and no interest. “We're bringing buy now, pay later to these cards because we know our customers want to be in control of how they pay,” Rachel Stocks, executive VP of global premium products and benefits at American Express said in a statement.
“The ecommerce aspect of buy now pay later was perfectly poised for the pandemic,” says Oliver Yu, an analyst at CB Insights. “As soon as lockdowns happened, in-store shopping capacity dropped to zero overnight and buy now, pay later really enabled merchants to still make those sales and offer an attractive differentiator.”
Earlier this year, Affirm went public. Six-year-old Afterpay, which came to the U.S. in 2018, was valued at a market capitalization of $30 billion. Retailers including Sephora, Macy’s and Peloton are all tapping buy now, pay later services to help spur demand with shoppers. According to CB Insights, buy now, pay later services were mentioned on earnings calls by corporate executives a record number of times in 2020.
“[Klarna] also has been a nice accelerant for us in terms of new customers,” said Macy’s CEO Jeff Gennette on a recent earnings call with analysts, noting that two-thirds of the shoppers brought in by Klarna during the fourth quarter were not previously shoppers at the chain.
But as established financial brands expand into the sector, and new players continue to grow, they are challenged to increase consumer awareness. When a checkout screen offers a bevy of logo choices, these marketers are banking on brand equity to carry them through the sale.
“At first it was all about the exclusive merchant relationships, and now it is an arms race competition between many players in terms of building trust with consumers,” says Lindsey Slaby, founder of Sunday Dinner, noting how now some payment providers have partnerships with the same retailer.
Over the last year, PayPal has followed the trend of consumers looking for alternative payment strategies by expanding its pay later options, which now include a “pay in four” option it rolled out in October ahead of the holiday season, according to Greg Lisiewski, VP of global Pay Later Products at PayPal. The service is applicable to purchases between $30 and $600 in cost.
Yet unlike newer brands like Klarna or Affirm, PayPal carries the weight of two decades of brand recognition in the U.S. According to a recent survey from Ad Age-Harris Poll, 56% of online shoppers are already aware of PayPal, compared with 23% for AfterPay, 20% for Affirm and 19% for Klarna.
Lisiewski says that PayPal’s edge in the new buy now, pay later product is that it is likely carried at all of the same retailers that may have individual relationships with rivals such as Affirm or Afterpay.
“What’s nice about our offering, from a consumer perspective, is because we can build the awareness—as long as PayPal is there, you’re going to get Pay in Four,” says Lisiewski, noting that even if a merchant already has a deal with a competitor, PayPal will still have its logo at checkout. “We have essentially ubiquitous coverage so the consumer doesn’t have to wonder, ‘Should I get it with Affirm or Afterpay, I can just get it all with PayPal.’”
While newer brands are especially adept at attracting younger shoppers—Macy’s Gennette noted the influx of shoppers under age 40—PayPal says its new service has seen robust repeat usage across demographics. That includes digital natives, but is not exclusive to that population, according to Lisiewski. The company is using its broader marketing program and established retailer partnerships to promote the offering.