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Klarna: What’s the catch?


Klarna, a Swedish fintech company, empowers millions to ‘shop now and pay later’, delaying payments with interest-free credit. 

Users are able to use Klarna to checkout at major companies such as ASOS, Schuh and JD Sports, or at thousands of online storefronts via the Klarna app

Now when shoppers proceed to checkout, they not only can choose to pay with card and PayPal, now they can ‘Klarna’ it.

The process has seduced millions of millennials allowing them access to a free, sustainable alternative to high-cost credit cards. 

As JD Sports told the Guardian in 2018, it’s for people who: “wanna cop some new gear but can’t wait until payday”.

Klarna Co-founder and CEO, Sebastian Siemiatkowski, told the BBC that it wishes to “drive up standards” of the e-commerce industry, stating that retailers have seen the average value of orders increase by 40%. 

The innovative Buy Now, Pay Later (BNPL) market has boomed with new firms Affirm, Afterpay and Billie and existing companies such as Paypal and Mastercard competing to provide short-term interest-free credit to consumers.

The companies make money by charging merchants 2-5% or purchase amount, placing the cost of credit on the retailer.

The market grew exponentially during the pandemic, with transactions increasing by between 60-70%, as people were forced to shop online and money became difficult for many.

With investors piling into the industry, it is expected to be worth $166bn by 2023, according to GlobalData’s research. 

However, it has also faced growing concerns about consumer welfare, as many question: what’s the catch? 

The entire post-payment sector has been criticised for encouraging users to get themselves into debt using ‘free money’ to make purchases they otherwise couldn’t afford. 

The Which? report into the BNPL market shows the typical consumer has characteristics such as recent defaulting on bills, that suggest they will be vulnerable to collating debt.

The opportunity to pay in installments appeals to young and low-income consumers, who are less likely to be financially aware or secure. 

A review by the UK Financial Conduct Authority found that 75% of users were under the age of 36, and 10% of people using BNPL already had debt arrears in other areas of their lives. 

Marketed as an alternative to traditional credit, users can split payments into three installments to be taken automatically from a card within 30 days, or paid earlier on request. 

Additionally, they can choose to delay payments for 30 days and then pay in full, so consumers can ‘try before buy’ and only pay for what they keep.

In this instance, customers can order several sizes of an item of clothing, try them and return any that don’t fit without being charged the full amount. 

And, in markets where long-term financing options are available, interest rates may apply to customers.

If customers miss payments, they can be charged with late fees, incur penalties and damage their credit scores. 

But many critics have argued that the risks associated with this type of borrowing are not clearly advertised and explained to users. 

Last December, the UK’s Advertising Standards Authority banned several of Klarna’s adverts claiming that they “irresponsibly encouraged the use of credit” without pointing out that BNPL services are a form of debt. 

This criticism has evoked fears, with Klarna’s home country Sweden making it illegal to offer BNPL options such as Klarna ahead of other options.

And in February the Government announced that Klarna and other competitors would be subject to regulation from the Financial Conduct Authority. 

However, this has not stopped investors, with a fundraising round led by SoftBank Group’s Vision Fund 2 boosting the company’s value to $45.6bn this May.

Klarna Bank AB was first set up in 2005, and has continually grown in its 16-year history.

Recently, they have acquired UK-based price comparison service Pricerunner for €930, stoking opinion that the fintech firm wants to become the new ‘Google for shopping’. 

Additionally, they have partnered with online payments processor Stripe, which in March became the most valuable private company in Silicon Valley. 

The integration allows many retailers in the UK, US and Europe who use Stripe to add a Klarna option at their checkout, broadening consumer choice. 

The deal draws parallels to Square’s $29bn acquisition of Afterpay in August of this year. 

Additionally, the brand just launched in its 18th market: the Republic of Ireland, four years after signalling interest in the country. 

Heeding from this recent crackdown, the service now provides a ‘Pay Now’ service in over 20 countries in order to give consumers more clarity and control over their purchases.

Additionally, Klarna is implementing stronger credit checks by allowing users to share data from their bank accounts to determine if they can afford repayments, however, this remains voluntary.

The fintech firm says it will include clearer language at checkout to inform users about the risks of borrowing and the possible consequences.

Sources: Klarna, Guardian, Financial Times, Sifted, GlobalData, Tech Crunch +, CNBC, BBC, Which?

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