There’s been a lot of talk about Buy Now Pay Later (BNPL) in the news recently. But it’s not always clear what’s fact and what’s fiction. We’re here to clear that up.
Klarna was created to allow consumers to shop, pay and bank flexibly on their own terms. A recent independent report by global consultancy Bain showed that over three quarters of people in the UK feel that spreading the cost of purchases helps them better manage their finances and pay for things you really need.
By contrast, traditional banks have long profited by exploiting customers – treating people unfairly by charging excessive interest. In fact, shopping on credit cards cost UK consumers £5.6 billion in interest alone last year whilst smarter shoppers who used BNPL saved £76m. Meanwhile, an increasing number of consumers have been shopping smarter, taking advantage of no interest payments that allow you to manage your money how you want. That’s why we have extremely low default rates – 30-40% lower than traditional credit card companies.
So why has Klarna been so much in the news?
As a new and fast-growing sector, BNPL is often in the public spotlight – and that’s something we’ve always been comfortable with and welcome. Through scrutiny and competition, we are challenged to always keep learning and improving to better serve consumers. Like any company we don’t always get it right, but we’re committed to doing better and listening to all concerns. Unfortunately, many of these concerns being raised against Klarna recently are based on poor data sets and conjecture, unsurprisingly fed by the same organisations who are incentivised to keep propping up the ailing credit card industry or traditional banks and credit card companies themselves. These headline grabbing misconceptions are often far away from the experience of over 15 million UK Klarna customers.
So let’s take a look and address the top three most commonly reported misconceptions:
Myth 1: Klarna doesn’t carry out sufficient credit checks
Truth: Our Pay in 3 and Pay in 30 products do not impact credit scores but this doesn’t mean using Klarna is free from checks. On the contrary, we conduct strict eligibility assessments including a soft credit check on each and every transaction users make, checking their ability to repay in real-time. We know situations can change and we don’t want to lend to consumers if they cannot repay. These products charge no interest so you only ever pay the original price of the purchase. We make our money from charging retailers, never you. This means we are incentivised to keep you out of debt and make repayments on time and in full.
We also offer a traditional regulated credit product, Financing. This is used for larger ticket items such as furniture and electrical goods where you might need to spread the cost over a longer period of time (from 6-36 months). Financing is dependent on a full (hard) credit search which can influence customers credit rating and missed payments are subject to late payment charges.
You can find more information on credit scores and Klarna here: https://www.klarna.com/uk/blog/does-klarna-impact-my-credit-score-2/
Myth 2: Consumers don’t know Klarna is credit
Truth: Over 90m consumers across 19 countries, of all ages from 18+ and from a wide range of professions are embracing Klarna’s approach to sustainable credit. We don’t doubt you feel offended by articles that suggest that they aren’t financially savvy. Almost two thirds (64%) of adults that have used BNPL said the flexibility helped you manage your finances. We tell everyone upfront exactly how much and by when you need to repay and we send multiple reminders – so there’s absolutely no doubt that you are borrowing interest-free money and that you have to pay it back. Additionally, it is clear at the checkout and in our Ts and Cs that we’re offering credit.
We’ve invested over 50% of our marketing budget in 2020 and 2021 in financial wellness as well as investments to improve the services we offer including useful tools and resources to help you manage your money. These include our in-app budgeting tool, spend tracker so you have complete oversight of recent purchases, and price drop notifications to help you get the best deals within the budget you set yourself.
Unlike credit card companies, who incentivise debt because it’s how they make money, we don’t profit from missed payments. In fact, 40% of users repay early and our average outstanding balance is £48 compared to £1081 on credit cards.
On the very rare occasions we are unable to make contact with a you for an extended period of time to collect repayment, we work with debt collection agencies but only as an absolute last resort. Unlike credit card companies, we don’t work with any that use bailiffs. When we work with debt collection agencies it is purely as an extension of our own efforts to contact you. The contact will never be face to face, and no fees are added as we don’t sell on the debt.
Myth 3: Using BNPL encourages a culture of debt
Truth: BNPL is designed to stop you from building up long term debt, unlike credit cards that encourage debt to mount up with an open line of credit and minimum payments. We believe a better world is one in which debit cards and buy now pay later replace credit cards and other forms of high cost credit.
We’ve designed our products around responsible spending. We check your ability to repay on each and every purchase so using Klarna is not guaranteed. We provide an upfront clear repayment plan and we restrict the use of our services after missed payments to prevent debt accumulating. We never offer an open revolving line of credit; each time you use Klarna, it’s linked to a specific purchase. We think this is a more sustainable form of credit. It wouldn’t be responsible for us to lend to everyone, every time.
While we believe you should first and foremost pay with the money they have, there are going to be situations where you prefer or need to use credit. And in those situations, Klarna offers fair and sustainable interest free lending. This can be particularly helpful if you work flexibly or are self-employed, want greater control over your finances, are otherwise excluded from short-term borrowing, or from preventing you from into high-interest loans.
As a fully licensed bank with regulated products, we already operate in a regulated environment and carry that level of rigour across all our business. We have long championed regulation of the buy now pay later sector so high standards can be consistently applied across all providers — especially as more traditional banks, who have a long history of using dirty tricks to bury you in debt by charging double-digit interest, enter the space.
So that’s the fact vs the fiction. We hope you found that useful and feel even more confident that Klarna can help you shop smartly.