Consumers change payment behaviour to manage personal liquidity in hard times

The impact of the war in Ukraine on consumer confidence has been significant as inflation and interest rate rises have increased, costs have risen, and consumption has slowed down. In Germany, where Computop manages 38% of the online payment transaction market, we have seen a slight rise in purchasing in recent months, and the German retail association, HDE, has seen nominal growth for the entire retail sector of 3% by comparison with 2022. However, purchases made online are static at best. The Online Retail Index of UK membership organisation, IMRG, found a -1.2% year-on-year decline in online sales in June, the 26th consecutive month with negative or flat growth.

Amidst all this, however, consumers still need to shop. To manage increased prices they are seeking out bargains and conducting price comparisons, but it is how they pay for their goods that is allowing them to create liquidity in their pockets.

Credit cards, great if used responsibly

Credit cards have, for a long time, provided consumers with the ability to enjoy a period of grace between making a purchase and settling the bill. Responsibly used they allow more time to meet the cost of an item and they offer other benefits to users. Building credit can be an advantage, and if a product purchased with a credit card is faulty the customer has better protection when it comes to a refund. Some consumers are using their credit cards to build reward points or for cash-back on purchases and they have the confidence of knowing that they are protected against fraud.

It’s hardly surprising that in February of last year net lending in the UK via credit cards reached £1.5 billion, the highest since Bank of England records began in 1993.  What is more, the global credit card market is expected to grow to $107.7 billion in 2025 (from $100 billion in 2020) at a CAGR rate of 1.1%.

Paying by instalment

Credit cards, however, are not for everyone and the fear of being unable to manage the payment and any interest that incurs from not paying on time, means that consumers have sought out alternative methods. Increasingly the online retail check-out process, not just in the UK, but across Europe, allows consumers to pay for goods with partial or instalment payments, using deferral agreements or through other forms of credit. In some cases physical retail stores, in Germany for example, are also offering these models to help their customers. In France, a survey amongst 750 consumers in 2021 showed that 30 percent were using instalment payments.

BNPL ticks boxes

But it is the availability of Buy Now Pay Later (BNPL) schemes that has had probably the greatest impact on continued consumer spending. In August, Klarna announced that it had reached more than 100 million European users with gross merchandise value increasing 14% year on year in Q2 2023. Since 2020, the firm has expanded widely, launching in eleven markets and forging 470,000 European merchant partnerships.

Its growth is despite the uncertainty of regulation in the sector, and the challenges faced by other providers. Clearpay, for example, stopped operating in Italy, France and Spain in August after its parent company, Block, shut down operations.

Since regulation of BNPL has always been a contentious topic, it was interesting to note recently that the UK government is hesitating to bring in stringent regulations that might trigger the withdrawal of interest-free BNPL services. The concern is that consumers would be negatively impacted by a lack of access during the cost-of-living crisis.

There’s no doubt that consumers like the flexibility of BNPL. It has proven invaluable for the purchase of goods which can be paid for by spreading the cost to make it more easily affordable. Younger consumers in particular favour this model, but shoppers across all age groups are taking advantage of BNPL to help them finance more expensive purchases and are fully aware that if they default, they will face a late repayment fee.

In France, where Klarna does not operate, another provider, Alma, has built its €2 billion business without ever charging late fees. It prides itself on being successful but not at the expense of the consumer, which means it has a strong incentive to offer its services to customers who can afford repayments.

For online merchants competing for consumer spend, the ability to offer BNPL through partnerships with companies like Klarna has given them a much needed boost. Not only is BNPL an attractive feature, but its simplicity is attracting a generation of shoppers who are managing their liquidity in a new way.

Evidence suggests there is a clear correlation between BNPL and order values. Recent research found that 57% of UK retailers offering the payment mechanism saw an increase in basket conversion and, compared to card payments, orders using BNPL could be between 20 and 30% higher in value.  That said, the cost of BNPL lies very firmly with merchants. Instead of charging consumers, BNPL providers make their money by taking a cut from everything they enable a retailer to sell.

In summary

As the squeeze on consumer pockets tightens and Christmas approaches, more and more customers will be looking for the best way to manage their budgets. Whilst there are nuances in how shoppers in different European countries prefer to pay, spreading the cost of purchases is increasingly finding favour with many. Retailers would be wise to offer a range of options which not only deliver flexibility to customers and respect their right to choose the method that suits them best, but which also facilitates the all-important seamless checkout process.