‘It is an arms race competition,’ says one industry expert about the $8 trillion credit, debit and prepaid card business.

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.

“This Klarna commercial has me howling,” tweeted @TheReelGay, while @LoriMartin tweeted “I don’t know what a Klarna is but I’m here for @MayaRudolph and Patrick Swayze’s brother.”

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.

Regulation challenges ahead

But while afterpay adoption is still relatively nascent in the U.S., it could meet with increased inspection from financial regulators moving forward, experts predict. Critics have said that these brands are persuading younger consumers to incur debts that in some cases, they cannot pay off.

“Any time you buy something now and pay it off later, it is a form of debt,” says Rathner.

In the U.K., for example, regulators are already paying close attention to the potential debt pitfalls, recently banning an Instagram ad from Klarna that likened shopping to mood boosting.

“As this model continues to gain traction, regulators are going to pay closer and closer scrutiny to it to make sure consumers aren’t being predatorily targeted and that’s it’s not adversely affecting the consumer,” says Yu.

In the meantime, the model remains appealing to both consumers and merchants. Younger customers, already accustomed to shopping online, are gravitating to pay later services now more than ever. More than 50% of online shoppers ages 18 to 34 said they use pay-by-installment services at least half of the time they make purchases, compared to 39% two years ago, according to a survey conducted by Ad Age-Harris Poll. Overall, 30% of online shoppers use such payment plans at least half the time, compared to 25% in 2019, the survey found.

“You look at millennials and Gen Z—their lifestyle—they’re already used to subscription models,” says Greg Fisher, chief marketing officer at Affirm. “Think about Netflix or Rent the Runway or Dollar Shave Club where they’re used to receiving a product or service and having that fixed monthly payment versus what you would get with a credit card with variability.”

For retailers, teaming up with an after pay provider gives them access to new customers, reachable through the provider’s own marketing network. For example, if a retailer signs up with the Afterpay brand, they are part of the Afterpay community of merchants that get blasted to Afterpay’s entire customer network with emails and in-app communications to shoppers, according to Dan Wallace-Brewster, senior VP of marketing at Scalefast, which helps brands improve their ecommerce offerings.

“The value for merchants in terms of positioning from BNPL providers is they will increase your cart size and conversation rate, but more and more they’re going to be able to provide that new customer,” he says.

Tapping differentiators

To stay ahead of the competition, Klarna is trying to position itself beyond simply a payments provider. After the awareness boost from the Super Bowl spot, the company recently hosted a 48-hour live-streamed shopping event with Cosmopolitan Magazine that featured exclusives from brands such as Rebecca Minkoff and Bluemercury. Klarna plans to do more of such events, but it is also investing in initiatives like sustainability goals in order to better connect with today’s modern customers. Klarna pledged 1% of the capital it raises moving forward to sustainability efforts, Sandström says.

“We’re always looking for new ways of engaging our consumer base and retailers,” he says. “If you look at online retail today, it is very transactional and it’s lacking a lot of the emotional components that you’d have in the physical space—talking to your friends, trying stuff on. Us slowly starting to tap into digital events and live shopping, that’s really in line with what we want to become as a brand.”

Afterpay is focusing on its merchant relationships and using its app and website to refer traffic back to retailers. In December, Afterpay referred more than 45 million customers to brands with which it has relationships, according to Geoff Seeley, who joined as chief marketing officer a year ago after working at Airbnb. Though Afterpay has done some TV and out-of-home advertising, it’s also focusing on marketing itself, with its retail partners, to its younger customers where it knows they live—on social channels. The company was a sponsor of London Fashion Week, for example. In the fall, Afterpay worked with Crocs for a promotion called Croctober that included TikTok content around how customers prefer to wear the straps on their clogs. The campaign included a custom song that resulted in 60.1 million views. Seeley notes the value of community in building the Afterpay brand.

“Our job as the verb in the category is to build equity in that—what is to afterpay?” Seeley says. “It’s not just a payment tool that’s buried deep in a merchant’s site. We’re a brand that represents the lifestyle our customers are living and increasingly demanding.”

Affirm, which has run marketing campaigns with retail partners including Walmart and Warby Parker as well as its own holiday “Gifts not Gotcha” brand campaign, is exploring other industries where a buy now, pay later strategy might resonate. The brand is looking into the travel category, for example, according to Fisher. In addition, Affirm recently announced it will begin offering a debit card, which is connected to a bank account and usable anywhere that accepts plastic already. The advantage of the card is that it gives users the option to review eligible purchases after they’ve been made and switch them to payments over time, Fisher says.

“This card is going to be game-changing for any person that wants to pay over time,” he says. “It’s literally opening up all of commerce.”

The card could also be useful for customers returning to in-store shopping. While many buy now, pay later providers also offer a brick-and-mortar option, they’re challenged to recruit new customers within physical stores because of the length of time it may take for credit approval. Online the approval process takes one or two minutes, but in stores, that could appear lengthier if there is a queue.

“It’s making sure the user experience is very smooth,” says CB Insights’ Yu. “The availability in store and omnichannel is going to be key.”

Along with that seamless experience, brands, particularly the newcomers, need to make sure they are building confidence with consumers through trust.

“Trust is huge because when you’re dealing with something as personal as people’s money, if you feel as if the company has done you wrong, it hits you in the gut—you’re not going to give them your business anymore,” says Nerdwallet’s Rathner. “But if you feel like a company has enabled you to make a purchase you needed to make and everything they’ve told you has been true, then suddenly that company is on your side—they’re still a company and they’re there to make a profit, but their service is of value to you.”

About Author

Adrianne Pasquarelli

A reporter with Ad Age since 2015, Adrianne Pasquarelli covers the marketing strategies of retailers and financial institutions. She joined Ad Age after a dozen years of writing for Crain's New York Business, where she also focused on the retail industry. Over the course of her career, she has won awards from the Society of American Business Editors and Writers, the National Association of Real Estate Editors and the Jesse H. Neal Awards.

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