BERLIN – Kira Siewert, an 18-year-old apprentice, found an alternative way to purchase clothes despite having limited cash. She turned to short-term online credit schemes, joining the increasing number of Germans who are embracing buy now and pay later options. Siewert used Klarna, an app that offered her the choice to pay after 30 days or in three interest-free monthly installments. This trend, which contrasts with the traditional German thriftiness, is gaining traction among younger generations.
In our generation, this topic of credit is no longer secretive, Siewert stated, acknowledging the different perspectives between her and her parents. While her parents adhere to the conventional practice of buying only what they can immediately pay for to avoid debt, Siewert and her peers have a more relaxed attitude towards credit.
This emerging trend of opting for short-term online credit schemes reflects the changing mindset of Germans, particularly young people. Despite the challenges posed by inflation, higher job security enables them to comfortably repay these smaller loans. Holger Schmieding, chief economist at Berenberg, believes this shift is part of a long-term trend towards wider adoption of credit by German consumers, making them more similar to their European counterparts.
These quick loan schemes, although making up a small fraction of overall credit, could potentially provide a much-needed boost to Germany’s economy. As the country’s export-based model faces challenges due to sluggish global demand, increased consumer spending facilitated by these schemes could support a shallow recovery. Fitch Ratings’ economics team expects that Germans will gradually lower their high savings rate and increase consumption, leading to a revival in the economy by 2024.
Germany’s high saving rate has traditionally set it apart in Europe, with households saving close to 20% of their income on average, significantly higher than the EU average of 12.7%. Moreover, credit cards are not widely used in Germany, with only 29% of citizens having used them in the past year, compared to 60% in France. However, in 2022, Germany observed a surge in the popularity of installment loans, with more than 9.1 million contracts signed, a 30% increase from the previous year.
Among these loans, over 42% were for amounts under 1,000 euros, indicating a preference for smaller loan sizes. The 20-39 age group accounted for more than 50% of these smaller loans. According to Kai-Friedrich Donau, head of Corporate Social Responsibility at SCHUFA, younger people are increasingly financing smaller amounts with loans, starting with modest loans between the ages of 18 and 19. However, as they enter the workforce and establish regular incomes, the loan amounts tend to increase substantially.
Buy-now-pay-later (BNPL) schemes have gained significant popularity in Germany, Finland, and the Netherlands compared to other EU countries. The Bank of International Settlements reports that one in four German merchants offers this payment option online. Klarna, a prominent player in the market, relies on BNPL schemes as the cornerstone of its business model. The short-term dealer-financed loans offered by Klarna do not impose any costs on the end customer.
The appeal of these schemes extends to both ends of the age scale, attracting younger Gen Z customers and older baby boomers. Nicole Defren, head of Klarna in Germany, emphasized that the main advantage of buy-now-pay-later schemes is their association with specific purchases, preventing customers from accumulating significant debt.
Nevertheless, while younger Germans are increasingly embracing credit, their cautious approach ensures that they only buy what they can afford. Defren explained that popular products like pay-in-3 allow customers to split payments over a few months but discourage prolonged debt accumulation typical of revolving credit or credit cards. Germans also boast a high repayment rate, with SCHUFA reporting a repayment rate of 97.9% for installment loans in 2022.
In conclusion, the rising popularity of buy now and pay later schemes in Germany, particularly among younger generations, reflects changing attitudes towards credit. This trend, which deviates from traditional German thriftiness, could potentially provide a consumption boost to the country’s economy. With high job security and confidence in repayment capabilities, Germans are increasingly comfortable using short-term online credit schemes to manage their finances.
