[a version of this blog post originally appeared in City A.M.]
A banker will lend you his umbrella but only on a sunny day, as the maxim goes. When it rains, he’ll want it back. Well, it’s pouring outside and consumers are seeking shelter from the rising cost of heating, electricity, petrol, food and mortgages. Credit card borrowing is at its highest since 2004 and credit card companies have responded by hiking rates even further; you can keep the umbrella but you’ll pay for it.
At times like these, we all have a duty to help consumers. For credit providers this means making responsible lending decisions, helping customers pay on time, and providing extra support to those who fall behind. Buy Now Pay Later enjoys structural advantages here. It is used for small amounts and fully repaid after 60 days according to a clear payment schedule agreed upfront. The provider makes a credit decision on each purchase, so is more up-to-date; with a credit card, the credit limit is set when the account is opened and then rarely changed. That’s why Klarna’s default rate is 30-40% below credit cards at less than 1% and outstanding BNPL balances are £140 compared with over £1,000 for a credit card.
We’re building the world’s most responsible credit business.
But we mustn’t be complacent. As we’re building the world’s most responsible credit business, we want people to stay out of long term debt. Over the years, we’ve experimented with different approaches to late fees; we have them in most markets except the UK. It’s a delicate balance.
Absence of late fees leads to less favorable outcomes for customers.
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 favorable outcomes for customers: with less reason to pay on time, customers are more likely to over-extend. In the Netherlands and Belgium the introduction of late fees improved Klarna’s on-time payments by 20%. And, in a recent YouGov survey, 75% of British consumers said they were more likely to pay on time if there was a late fee. It’s like a city with no parking tickets; it sounds great, but in practice turns out to not be so great when you find a giant SUV blocking the last available parking space.
We’ve concluded that having no fees is not in the best interest of our customers, but we don’t want to rely on fees or charge extortionate amounts like traditional banks who monetise the misery of customers who fall behind. After all, if everyone paid their credit card bill on time, the card companies would go out of business. To avoid becoming like those banks, we have two strategies.
We’ll do everything we can to prevent customers from missing a payment.
Firstly, we’re introducing a small fee of £5 for late payments, but we’ll do everything we can to prevent customers from missing a payment, including offering automatic payments, sending four friendly reminders, and applying a seven day grace period before we charge a fee. We’ll monitor and cap the fees, applying a threshold on the total amount we can collect to make sure it works in favour of our customers – if it doesn’t we’ll change it.
We’ll use the funds collected to directly support customers who have fallen behind.
Secondly, we’ll use the funds collected to directly support customers who have fallen behind. Under our Customer Recovery Programme, which we will launch later this year, Klarna will proactively contact customers with long-overdue payments and offer to waive 50% of their balance. Eligible customers will need to pay the remaining 50% before making any additional purchases and will avoid having their debt sent to debt collection. The programme will help customers who are behind on payments avoid debt collection and get back on track with their money management.
We reduced fees by $100m a year in Sweden.
We’re used to self-regulating like this and even reduced fees by $100m a year in 2021 in Sweden but we’d like the FCA to limit late fee revenue for banks which it has the tools to do with the upcoming Consumer Duty. This would ensure fees only encourage timely payments and not become a source of profit for banks.
At Klarna, we are building the world’s most responsible credit business and we think driving better customer outcomes would be a good way to regulate the industry. Our ambition remains to take on the trillion-dollar retail banking industry and put money back in the pockets of consumers. As the financial storm gathers force, we must protect consumers from the predatory practices of the big banks and traditional credit providers.