How Klarna created a nation of shopaholics

Telegraph

4 days ago

In just a few clicks, that big-ticket purchase you've been mulling over for weeks is reduced to a trifling monthly fee – or postponed until after the next payday.
Buy now, pay later deals (BNPL) have long been offered by retailers to help spread costs of big purchases. But Klarna, a Swedish lender specialised in the form of consumer finance, is making them ubiquitous.
Emma Reynolds, Economic Secretary to the Treasury, this month said companies like Klarna were operating in a 'wild west' devoid of adequate regulation, as the Government confirmed long-awaited new rules for the sector akin to those followed by banks and other financial institutions.
Klarna is increasingly offering the BNPL payment option for more than just one-off big purchases. Everything from haircuts to takeaways can now be snapped up by its users on zero-interest deals merely by filling in a few extra details at online checkouts.
It is a formula that won the company an extra million British customers last year, with 11 million now using the service.
But there is growing disquiet over whether companies offering BNPL are fuelling imprudent consumer spending.
Klarna first courted controversy for its marketing campaign during the depths of Britain's Covid-19 lockdowns.
Posts on Instagram by influencers promoting the product at the time called it a 'total mood booster' that enabled them to 'splurge' on their shopping, earning Klarna admonishment from the advertising watchdog in 2020 for having 'irresponsibly encouraged' the use of credit.
There are good reasons why consumers have been flocking to BNPL companies like Klarna in recent years. The interest-free deals beat the easily high levels of interest charged on most credit cards.
Klarna estimates it has saved UK consumers £470m in credit card interest payments since it began operating in 2014. Data published on its website from 2023 also claims just 5pc of its users made late payments, while the majority fully repaid earlier than needed.
BNPL companies typically offer options to pay the full amount on a product right away, split the payment into three equal interest-free payments, or delay the payment for 30 days without paying any interest. Similar offers have also been adopted by payment platform PayPal.
Call for affordability checks
Klarna, as well as one of its largest competitors, Clearpay, have long been able to sell credit to consumers without affordability checks.
Unlike banks, consumers cannot make complaints about the companies to the Financial Ombudsman Service (FOS), which can order firms to pay out compensation in cases where they are found to have acted unfairly.
The absence of stringent regulation of BNPL has long sparked calls for tougher measures. New rules were finally confirmed by Labour this month, and will come into effect by the middle of next year.
The Financial Conduct Authority will require BNPL operators to conduct affordability checks on their customers, who will be able to bring complaints to the FOS for the first time.
Stella Creasy, the Labour MP who raised the complaint over Klarna's Instagram adverts in 2020 with the Advertising Standards Authority, described BNPL companies as 'legal loan sharks'.
The MP for Walthamstow singled out the late payment fee charged by the company, which is £5 for orders worth £20 or more, according to Klarna's terms and conditions. Late repayment fees are capped at £10 per order.
She has previously made the same criticism of BNPL operators in the House of Commons.
Ms Creasy said: 'Given the rapid growth of BNPL in the past few years, it is vital we regulate these legal loan sharks as quickly as possible to try to stem the debts they have pushed so many into.'
She also warned of potential loopholes in new rules, which are yet to be finalised in law.
'I urge the FCA to be vigilant and not to rule out acting if these providers try to avoid accountability under these new rules by portraying themselves as working for retailers who aren't covered by these requirements rather than lending money to consumers [directly].'
The new regulations are not expected to cover instalment financing deals offered by retailers themselves, presenting potential limitations of their effectiveness.
Ms Creasy added: 'But frankly, given the scale of the problem, the sooner these come into force the better.'
'Loans to fund day-to-day spending'
Most people using BNPL primarily purchase physical goods, such as technology, clothing and wellness products – according to payments platform Stripe.
But there is evidence to suggest that an increasing number of people who use BNPL firms, not only Klarna, are buying day-to-day essentials.
It has led to concerns that, instead of using the service for one-off large expenses that are easier to pay over time, consumers are turning to BNPL as a way to fund regular shopping.
Klarna has significantly expanded the range of retailers where it is available, with M&S and John Lewis recently partnering with the company. Users can now download a 'one-time card' worth a fixed amount that sits within digital wallets like Apple Pay to be used in person at shops.
A survey by Money Wellness, a debt advice company, found a 68pc increase in the number of people seeking help to repay BNPL debt in the past year. The average balance of those seeking debt support rose from £675 to £941 during that time.
Sebrina McCullough, of Money Wellness, said: 'We've seen a significant rise in people struggling with 'buy now, pay later' debt, often because they've used it to plug gaps in everyday budgets. For many, it's become a way to spread the cost of essentials, like food shopping, rather than to cover large expenses.'
Tom MacInnes, from Citizens Advice, has also noticed this trend. He said: 'We're helping more people than ever before who are struggling to repay unaffordable BNPL credit, and one thing is clear – BNPL is not a choice of convenience. For many, it's become a costly way to pay for basics, with little protection if things go wrong.'
Klarna has become so widespread that it is available on takeaway apps including Deliveroo and Uber Eats. There are even some hair salons on Klarna's website that are listed as accepting the form of payment, for which users must pass a credit check before being approved.
Most BNPL companies, including Klarna, limit the amount of loans a customer can take out based on their credit rating, allowing a customer with a good repayment record to stack up debt over time.
Limits on the individual value of transactions and restrictions are imposed on accounts if they miss payments.
Alice Tapper, a personal finance campaigner and author, said the spread of BNPL companies such as Klarna to pay for food was not the best use for the form of payment, but said it helped shoppers who were 'locked out' of obtaining credit cards.
'Is it a net positive? I think it depends on its use. There is a role for it in the market when you consider the cost of credit can be extremely high, and many people find themselves locked out of the financial system. An interest-free option is a good thing.
'It's now available on Deliveroo. Is that a good thing? Probably not; it's hard to argue it's an ethical use.'
Ms Tapper added that the target users of BNPL should be 'people who have a one-off large expense, such as costs associated with moving house', for whom 'it [doesn't] make sense to put such purchases on a credit card with high interest that might spike'.
'Not as bad as payday lending'
Martyn James, a consumer expert, came to the defence of BNPL companies, including Klarna.
He said the sector had 'become a bit demonised over the years, which is a little unfair, as it's not the same as payday lending – which traps people in an endless cycle of debt'.
He added: 'You'll be hard pressed to find an online shop that does not have a BNPL option, and the reason it is so popular is that it encourages people to make purchases they don't have the money to make.'
However, Mr James said this was concerning at a time when household savings are increasingly low in Britain: 'A lot of people swear by [BNPL] and say paying in instalments makes it easier.
'One in 10 British adults has no cash savings, according to FCA research, making this form of borrowing risky for some.
'But there are loads of people who have no savings whatsoever and live pay cheque to pay cheque. What happens if you get hit with an unexpected bill or are laid off and you can't make that payment?'
Klarna refers its customers to debt collectors if payments are not made by the last reminder due date. 'They're not hitting people with large amounts of debt charges, but they are handing people over to debt collection agencies which are aggressive,' he added.
New rules to lower risks
New rules will target BNPL lenders where they are acting as a third party between retailers and consumers, while instalment plans offered by shops are expected to remain exempt from stricter requirements.
Firms offering pay-later financing will be required to conduct affordability checks that determine whether a consumer can afford to pay for a product over the loan period. This usually includes asking for details such as someone's income and regular expenditure each month.
It is hoped that new regulations of BNPL will cut the risk of consumers using it for 'frivolous spending' and limit the deals to high-value items.
Ben Perks, managing director of Orchard Financial Advisers, welcomed the new rules and said: 'Many people succumb to the ease and appeal of BNPL, but it often turns into a thorn in their side.'
He added: 'The lack of responsible lending often sees borrowers over-exposed and stuck with unaffordable payments. With proper checks and balances, there is a place for buy now, pay later, especially on high-value essential items. But it shouldn't be a means to fund frivolous spending.'
A Klarna spokesman said: 'With credit card interest rates soaring to record highs of 35pc, more people are turning to interest-free BNPL providers like Klarna.
'We believe UK consumers deserve a fairer alternative – wherever they can pay with a credit card, they should also have the option to pay with interest-free BNPL, helping them avoid the trap of high-interest credit card debt.'