Ellie Howard* was 18 when she first used a buy now, pay later service (BNPL). With little financial education and no existing credit, it was easy enough for her to indulge in shopping sprees of clothes and makeup, seemingly, with hardly any consequences. But by the age of 22, she found herself drowning in unmanageable debt for items that she “never really needed” in the first place.
Now 27, Howard is still working her way through paying back all of the money she owes, but feels much more in control when it comes to her finances. While no longer a regular user of BNPL services, Howard says she finds Klarna is convenient when she wants to spread the cost of unavoidable purchases, such as around Christmas time when she needs to buy presents and January payday feels “a lifetime away”.
Recent years have seen the popularity of BNPL companies like ClearPay, PayPal and Klarna soar. In June 2021, Klarna secured a new round of funding from investors in a deal that pushed its value to $45.6bn (£33.6bn). Seven months on, it boasts 90 million active users across the world and facilitates two million transactions every day. In the UK alone, it’s estimated that seven million people use its services.
For someone with a poor credit history, it could give them an unrealistic idea of what they can afford
Klarna’s appeal is clear. Unlike the payday loans of earlier generations, which were dredged in both interest fees and warnings of how late payment could be fatal to your credit score, Klarna provides a means to finally purchase that handbag you’ve been eyeing up but can’t afford to buy in one go.
It is a business model that has paved the way for Klarna to partner with just about anyone, from fast fashion retailers to car repair services. Landing on Asos, it was marketed as allowing customers to “try before you buy”. The concept is simple; you place an order for all the things you want, and only pay for the things you keep. “Have a huge trying on sesh at home and send whatever you don’t want back, within 30 days of purchase. You’ll be charged (no interest or fees) for everything you keep, and payment has to be received within the 30 days,” a notice on the Asos website reads.
Klarna’s success could also be attributed to its marketing strategy, which experts say is specifically geared towards millennials and Gen Z. “Klarna’s pink branding and playful marketing campaigns have more affinity with the e-commerce websites they serve, rather than traditional financial service institutions,” says PR and marketing consultant Ann Fiona Martin. She describes Klarna “almost as an extension” of the fast fashion brands it works with, using “colourful brand image to attract a generation of spenders who want the latest outfit, beauty product or home accessory immediately”.
It’s this branding that sets it apart from more traditional banks or finance providers, adds Dawn Baxter, founder of digital marketing agency Beyond the Dawn Digital. While banks often portray stability and dependability in a bid to appeal to family demographics and homeowners to be, “Klarna is bright, colourful and vibrant”.
“The messaging is the opposite of worrying about the stable savings or investments of the future,” Baxter explains. “They speak a more open, clear language and do not feel the need to get heavy with terms and conditions from the outset. Pay in three months and there is no interest is really clear and feeds into the accessibility of their product. The young people they are speaking to are savvy and wary of credit cards, and this gives them an option that feels more casual and easier to manage.”
Last week, Klarna announced the launch of a Klarna card, which will allow customers to delay payment for things they buy in high-street shops for up to a month, whereas they could previously only use its services for online purchases. In a statement, Alex Marsh, head of Klarna UK, said the card will bring “the benefits” of its payment model to the offline world and give people “control” over their purchases. “Consumers are rejecting credit products which charge double-digit interest rates while allowing repayments to be put off indefinitely. For online purchases where credit makes sense, BNPL has become the sustainable alternative with no interest and clear payment schedules,” Marsh said.
Financial experts have warned that the Klarna card could increase the potential for financially vulnerable users to fall into debt. “As with any online payments, failing to repay within the timeframe still exposes consumers to the risk of having their card frozen,” Simon Kent, global head of financial services at management consulting firm Kearney, says, adding that he hopes to see Klarna exercise “responsible lending behaviour”.
“Affordability assessments will need to be run before issuing the card to ensure users’ safety and protection. Klarna is clearly working to protect its customers as it can, and until the regulation around BNPL is more clearly defined, we might not have a proper benchmark to fully measure their efforts,” he says.
Michelle Highman, chief executive of The Money Charity, says that while in theory, BNPL models like Klarna’s give consumers “greater freedom and choice in their purchasing power”, there is a risk that people could be taking on “unsustainable financial commitments”. “With providers beginning to offer further new options, our concern remains that those using the products fully understand what they are and just as importantly what they are not, and crucially how they are protected if things go wrong,” Highman says.
“The new card could be a useful tool for some, but it isn’t a credit card and doesn’t come with the protections of a credit card and it’s vital consumers understand this,” she adds. “We call on all BNPL providers to continue engaging positively with the process of bringing the market under proper regulation as soon as possible, as well as for them to take greater strides in the clarity and transparency of how their products are presented to consumers."
Every time you opened the app, there was always something new there that you could now buy, something that you couldn’t afford
In a statement to The Independent, a Klarna spokesperson commented: “Last year consumers saved over £100m in interest by using BNPL instead of high-cost credit cards. We launched [the] Klarna card to extend those savings to consumers who wish to shop at retailers which have not yet partnered with Klarna – be that online or in store.
“Unlike a credit card, we never charge interest or late fees on our BNPL products, so consumers only ever owe the cost of their original purchase. We re-evaluate the amount consumers can spend on a daily basis, and we freeze the card as soon as a payment is late, to stop consumers from getting further into debt. These controls don’t exist on traditional credit cards because if everyone paid off their credit card bill on time, the lenders would go out of business.”
One concern around Klarna’s payment model, highlighted by Howard, is how easy it was for her to get approved, despite her poor financial history. “My credit score was atrocious, and Klarna still gave me credit,” she says, adding that her score was “definitely in the red” and in the 200s figure. While Howard began using Klarna after having educated herself about her finances, she worries that others may fall into similar debt as she did at a young age. “There needs to be more education. When you sign up for it, you click through the terms and conditions, and you don’t look at them properly. For someone with a poor credit history, it could give them an unrealistic idea of what they can afford.”
This ease of use of Klarna and BNPL services could exploit people without financial education. “The risk of course, as with any credit, is that users take on unsustainable financial commitments, frequently driven by the urgency of their needs and a lack of understanding of the product terms to which they are agreeing,” Highman says.
Kirsten Dinwoodie had been a user of Klarna from April to December 2021. After her phone broke, she decided to buy one outright and spread the cost over 12 months using a Klarna finance plan. These plans, which are up to 36 months long, carry an interest rate of up to 18.90 per cent. While she had a mostly positive experience – it was easy to keep up with payments and track them through the Klarna app as they left her account every month – she says her contract did not make it clear enough that her plan included interest.
Dinwoodie claims she was asked just two questions relating to her salary and share of monthly rent or mortgage payments before being approved instantly. “It also wasn’t made explicitly clear that I would be paying interest, and I only realised this after the first month of payment was taken,” she says. A Klarna spokesperson told The Independent that Klarna finance is covered by the Consumer Credit Act, and that information regarding interest rates is made “super clear”.
As Klarna’s outreach and success has grown, so has the number of brands it works with. Dinwoodie recalls receiving “constant notifications and emails” advertising products that she could buy using Klarna. “Every time you opened the app, there was always something new there that you could now buy on Klarna, something that you couldn’t afford and before you knew it, you’d be stuck with constant monthly payments. It was debt that’s dressed up, and it doesn’t sit well with me,” she adds. Users can shop from brands from a whole host of industries ranging from fashion and beauty to car repair services and luxury goods.
This move into the luxury market, including designers like Kenzo, Stella McCartney and Aquazzura is allowing customers to purchase products “which would have been inaccessible to them before”, Kent says. This is consistent with Kearney’s research, which has found that people are increasingly using BNPL services to purchase “big-ticket items”. “Of course, it will be crucially important for Klarna to ensure the personalised caps provided to each user are appropriately adjusted to protect consumers at every level,” Kent adds.
Buy now, pay later borrowing can be like quicksand – easy to slip into and very difficult to get out of
While some people have highlighted Klarna’s pitfalls, its popularity is proof that its services are valued by many. One of these users is Lauren Fletcher, who has had a very positive experience with the company. “It helps me get the things I want when I’m short and then come payday I always just pay it in full and I love that there’s no interest added,” she says. “I’ve never been in debt with Klarna. I still use it, mainly for clothes. I’ve also used it for the occasional beauty products and my work-from-home equipment like a proper chair to stop my back hurting.”
Some debt charities have urged people to consider the affordability of repayments before signing up to BNPL schemes. “BNPL borrowing can be like quicksand – easy to slip into and very difficult to get out of,” Matthew Upton, director of policy at Citizens Advice says. “Split payments are offered as a temptation at the checkout, but the consequences can be devastating for those who are least able to deal with them. We’ve helped many who have slipped into trouble, including one who was sent a debt collection letter over a £10 purchase.” The charity did not disclose which BNPL service sent the letter.
“Another relied on BNPL to buy things such as their children’s school uniform but couldn’t afford the repayments. While BNPL can work for some, we’d be really worried if people were using it simply to make ends meet. We’re here to help anyone who is struggling to pay their bills or essential costs,” Upton adds.
*Name has been changed to protect privacy
