Buy now, pay later (BNPL) firm Klarna will start to charge "late fees" for missed payments from next month.
Klarna will charge customers £5 when they miss payments from March 16.
The BNPL firm said there will be no more than two late fees charged on an order, and the late fees will not total more than 25% of the value of the purchase.
Klarna claims the move is aimed to help curb loan defaults as more shoppers use the payment method amid the cost of living crisis.
Alex Marsh, head of Klarna UK, wrote for City AM last week and said: "Not charging fees feels consumer-friendly, but we’re worried it drives the wrong behaviour.
"Our data now shows that a total absence of late fees actually leads to less favourable outcomes for customers: with less reason to pay on time, customers are more likely to miss a payment.
"In the Netherlands and Belgium, the introduction of late fees improved Klarna’s on-time payments by 20%."
The Klarna boss said shoppers will not be slapped with a £5 fee immediately after they miss a payment and that it would do everything it could "to prevent customers from missing a payment".
This includes:
- Offering automatic payments
- Sending four friendly reminders
- Applying a seven-day grace period before a fee is charged
In his piece for City AM, the Klarna boss also said the funds collected by the company through late fees would be used to "directly support customers who have fallen behind".
Later this year Klarna will be launching its "customer recovery programme" which Alex Marsh says will "proactively contact customers with long-overdue payments and offer to waive 50% of their balance".
"Eligible customers" will need to also pay the remaining 50% before making any additional purchases.
However, it isn’t clear who Klarna will decide is eligible.
Klarna does now share the information for both on-time and missed payments to credit agencies.
The BNPL firm said this helps consumers who pay on time demonstrate "positive use of credit" to other lenders and "helps protect consumers from building up unsustainable credit with multiple credit providers".
Several major BNPL players already charge late fees in the UK, with both Laybuy and Clearpay charging a £6 late fee to shoppers.
BNPL practices have been in the spotlight recently as they could face tougher rules in a bid to provide greater protection for borrowers.
A consultation was launched by the HM Treasury this month which will look at how BNPL products could be brought under Financial Conduct Authority (FCA) regulation.
If it does, customers will be able to take complaints about BNPL companies to the Financial Ombudsman.
Providers would also be responsible for checking loans are genuinely affordable for customers, as well as providing clear information about the terms and conditions of borrowing.
