When Nick Molnar started out in business, his next-door neighbour thought there might be a nefarious reason why the 18-year-old’s bedroom light was on all night long.
As it turned out, Molnar was spending his evenings after college selling the excess stock from his parents’ jewellery shop on eBay.
After launching his own online jewellery business, he spotted that young shoppers were increasingly shunning credit cards but still wanted the instant gratification that came with retail therapy. It led to his idea to let shoppers pay for goods in instalments.
“I was 18 when the financial crisis happened and there was a real shift with millennial consumers preferring to spend on a debit card,” Molnar says on video call from Sydney.
After a brief stint in private equity he went into business with Anthony Eisen, the concerned neighbour, who also happened to be an investment financier 18 years his senior. Together they launched Afterpay, a “buy now, pay later” business. It is now valued at A$30 billion (£16.2 billion) on Australia’s stock market and has made the 31-year-old father of two a A$2.2 billion fortune.
The alternative credit business trades as Clearpay in the UK and within two years of launching here has rapidly grown to have two million customers in Britain and partnerships with 5,000 retailers including Marks & Spencer, Reiss and The Hut Group. The model charges retailers a fee that is slightly higher than the traditional credit card processing charge but fashion chains receive the funds instantly, while customers have the option to pay for their purchase in four instalments.
Molnar says that the credit crunch in 2008 scarred millennials who were spooked about the perils of debt. As a result, he says, bad habits of previous generations have been unlearnt.
The pandemic has fuelled an explosion of growth in the “buy now, pay later” market. Retailers have scrambled to sign up as an incentive to shoppers to feel more comfortable buying online, while they still get paid for their stock instantly. Molnar says retailers also benefit from shoppers discovering brands through the Clearpay app.
However, critics and debt charities have warned that “buy now, pay later” firms, which also include the rivals Klarna, Laybuy and OpenPay, can encourage shoppers to spend beyond their means. As a result, the Financial Conduct Authority is scrutinising the industry and its potential for harm.
Molnar says that he has “always been very pro-regulation from the start . . . this is a new model of financing and regulation needs to keep up. It’s disappointing when we get bundled in with providers that charge interest because we never charge interest, it’s not what we’re about.”
While Clearpay doesn’t carry out credit checks on its customers, it automatically blocks them from making another transaction on its site if they haven’t paid on time. As a result, he says, the company’s loss rates are only 0.7 per cent compared with typical credit card default rates of 3 per cent to 5 per cent. Clearpay charges customers an initial £6 if a payment is missed and a further £6 if it is still not made within seven days, but fees are capped at 25 per cent of the purchase price.
The booming growth of the market is tempting traditional lenders such as Barclays to enter the space but Molnar argues that they are only trying to enter into the interest-free “buy now, pay later” market as a gateway to selling consumers products that do end up charging interest.
Molnar says that although “buy now, pay later” is often associated with young shoppers, the average Clearpay customer is in their mid-thirties. “People think of millennials as young but they have got older. In seven years millennials will earn half of the disposable income and they already account for 30 per cent of retail spending. Their preferences are becoming mainstream and they are a powerful force.”
However, he admits that the wider financial market still needs to be revolutionised as young consumers could risk being shut out of traditional products, such as mortgages, if they don’t have a credit score. “Buy now, pay later” products and debit cards don’t give evidence of their creditworthiness. “There needs to be an evolution in risk framework,” he agrees.
Clearpay offers current accounts in Australia but applying for a banking licence in Britain seems some way off. For now Molnar is focused on the next stage of growth for the company and its return to retail by offering customers the ability to use Clearpay to pay in instalments for purchases made in bricks-and-mortar shops too. The move has been launched in Australia, New Zealand and the US and Molnar confirms that UK plans are in the pipeline.
“From the other market launches, we know offering in-store payment provides an enormous opportunity to reach new customers who, out of habit or preference, opt to shop in-store,” he says. For high street retailers that have been ravaged by the pandemic anything that encourages shoppers will be welcomed with open arms.