In The Red: Is Klarna the new debt-ridden store card?

By Selena Wu, Fashion Consultant

No drama, just Klarna? In the past few months, Klarna has been criticised in the news on a regular basis. A recent article in The Times warned shoppers that the bank was ‘slapping high fees on unsuspecting users’; one woman paid £47.98 for two cardigans in November, but five months later she owed Klarna £83 and was preparing to call in the debt collectors. Founded in Stockholm, Klarna Bank AB was found to be offering not just zero-interest deals but formal credit agreements on shopping purchases as low as £35.

Klarna is one of a new breed of fintech companies, providing Buy Now Pay Later (BNPL) services to retailers. Retailers are able offer flexible payment terms and financing to their customers with little of the financial risk, whilst customers can shop whilst spreading the cost over time. Other players in this sector in the UK include Clearpay, Laybuy and Payl8r.

The benefits for retailers are obvious and are clearly outlined on providers websites, with Klarna claiming a 30% increase in conversion and up to nearly 70% increase in average order value when their services are offered to shoppers. Reduction in cart abandonment, increase in shopper frequency and increased spend are all cited as reasons to start offering BNPL services— especially as the service provider takes on all the risk of the customer not paying, in exchange for a small fee for each order.

For the customer, the process appears easy and the benefits are apparent. Each of the services work slightly differently, but all offer the option to pay in instalments, usually between 3-6 instalments over a short period of 2-4 months. In addition, Klarna and Payl8r also offers the options to pay the full amount between 14-30 days after receiving goods and financing over longer periods. All claim that there are no fees or interest for paying later or in instalments, and Klarna even goes as far to say that they do not charge fees or inform credit reference agencies if customers fail to pay using these options.

However customers can certainly damage their credit ratings, incur fees and even have their debts passed onto debt collectors if they are not careful— all facts that the companies appear to downplay on their websites. Klarna’s financing option, Payl8r and Laybuy all come with a hard credit check, which if failed, instantly lowers a customer’s credit score and later on if customers fail to pay and do not respond to communication credit reference agencies can be informed. In all cases, if customers fail to pay, the debt can be passed onto debt collectors, something that is conveniently not noted in checking out processes and advertising – something Klarna has been called out for.

All this is distinctly reminiscent of the store cards of the late 90s and early 2000’s. Back then, stores operated their own financing options, all sold with promises of discounts, easy repayments and special offers for customers. They conveniently omitted the fact that customers were given interest rates that were higher than the most expensive credit cards, being mis-sold PPI and entering into financial contracts with all the associated credit damage and effects of debt if they should fail to pay. The huge numbers of people that entered into debt resulted in legislation in 2011 that banned commission for salespersons and upfront discounts being attached to store cards, as well as allowing a seven day cooling off period after any store card sale. Big stories in the tabloid media and gossip rags of people who had fallen into thousands of pounds of debt through these store cards made sure that they rapidly fell out of favour.

Right now, Klarna is making waves, with slick advertising advising customers that they can ‘Shop Like a Queen’, seamless checkout processes that are almost ‘too easy’ and don’t come with all the usual amounts of small print text, making customers feel as though they aren’t getting a loan, even though that is exactly what they are doing. Many people have warned that services like Klarna are helping to get people in to debt, something which seems to be becoming true, as it’s reported that the number of payments owed to BNPL companies in the UK has risen by 300% in the 6 months to March. 

Currently, other than financing over longer periods (provided by Klarna and Payl8r), BNPL services are lightly regulated, however this is something likely to change. There are increasing numbers of stories about people who have landed in debt, communication from BNPL not working and customers getting charged fees or having even small debts passed onto collectors. They have also faced pressure from debt charities who have warned BNPL services should be much clearer to customers about the risks of using these services. Like the store cards that came before them, if debt continues to increase, then the government is likely to step in.

For retailers and brands who are looking for ways to encourage their customers to shop, BNPL services appear on the surface to be an excellent idea, especially for those who have seen their sales fall as the affects of Covid-19 hit their customer base. However the effects for your customer may result in financial hardship if they are unable to carefully manage their money. If more stories start to appear in the media about customers who have gotten into debt, BNPL services may end up being seen poorly by the public and tarnish the reputation of retailers who use these services.

Selena is a consultant working with fashion brands, helping them to elevate their image, develop their sales and marketing and refine their direct-to-consumer strategies. She is passionate about sustainable business models and enjoys working closely with management to realise the full commercial potential of brands at all stages of growth. To get in touch with her, you can drop her a line at selena@mise-en-seine.com or find her on Instagram @wu.selena