The buy-now-pay-later service is set to be regulated in the UK amid fears that it could leave its young customers with high levels of debt
“When I’ve decided, Missguided,” reads a pastel pink poster, designed to pique your interest as you ride the escalator from the tube to the street. “I’ll choose when to pay, Beauty Bay,” reads the next, before a third concludes, “No drama, just Klarna.”
You’d be forgiven for thinking the posters – with their curly, Comic Sans-style lettering – are advertising a clothing brand, a new media publication, or another girl boss co-working space (a la The Wing). What you might not expect is that the ads, in all their ‘millennial pink’ glory, are actually for a bank.
Namely, Klarna: the buy-now-pay-later service that is, all of a sudden, everywhere. It’s at the online checkout of every fast fashion brand; it’s being advertised by influencers on your Instagram feed – even Lady Gaga did spon-con for Klarna – and, much to its dismay, it’s in the headlines.
Although it launched in 2005, and came to the UK in 2014, the Swedish service surged in popularity during the coronavirus crisis, and, in September, became the fourth largest private fintech company in the world. When used as a payment method, Klarna enables its users to buy items online without having to pay anything until 30 days after the transaction. It also offers the opportunity to pay in monthly instalments.
Klarna isn’t the first banking service to do this, but it is, arguably, the first to do it so successfully. Klarna’s marketing strategy positions the company as a friend offering a helping hand, as opposed to a corporate bank offering a loan – and it’s perfectly hooked its target audience of Millennial and Gen Z shoppers, many of whom use it on small clothing transactions.
“It doesn’t feel like a normal, serious, adult credit situation,” 24-year-old Layla tells Dazed. “It feels young and fresh with a carefree, ‘Don’t worry, just pay us back later’ attitude. The branding is really clever as it’s deceivingly innocent for something that can actually get you into debt.”
Layla says she uses Klarna “quite regularly”, mainly to order multiple sizes of clothing items so she can return the ones that don’t fit without having to pay for them first – buy-now-pay-later services enable customers to effectively try before they buy. “For me, the main pro of Klarna is being able to make these large orders without waiting ages for the funds to be returned to my bank account,” she explains, adding that she’s never missed a payment and sees Klarna as having made her “savvier with money”.
“It doesn’t feel like a normal, serious, adult credit situation. It feels young and fresh with a carefree, ‘Don’t worry, just pay us back later’ attitude” – Layla, 24
23-year-old Regan uses Klarna every time she shops, and says she tends to “avoid shops if they don’t offer it as a payment method”. Like Layla, Regan uses Klarna to try before she buys, citing the fact that ready-to-wear sizes are inconsistent in different high street stores. “With the buy-now-pay-later option, your purchase with Klarna gets updated so that you have however many days to pay for the items you didn’t return,” she tells Dazed, “or it gets cancelled completely if you return everything.”
As Layla says, Klarna’s appeal to younger customers lies in its simplicity. The service bills itself as a “healthier, simpler, and smarter alternative to credit cards” – there’s no account sign-up, no credit check that appears on your record, and it says there’s no interest, fees, nor late payment charges. That all sounds great, until you don’t pay back on time.
In August, online complaints tool Resolver said it had received almost 16,000 complaints about buy-now-pay-later services in less than two years. As reported by New Statesman, multiple users stated that they were threatened with debt collectors despite making their payments, while others said their credit scores were damaged by missed payments of less than £100.
BUY NOW PAY LATER IS TO BE REGULATED! 🥳 🎉🎈 8 months of campaigning, 250 case studies and 1 threat of legal action later (thanks Klarna!) and the FCA has concluded that buy now pay later needs to be regulated urgently (1/5)— Alice Tapper (@AliceRTapper) February 2, 2021
As Klarna continued to soar in popularity, so did concerns about young customers facing high levels of debt. Because buy-now-pay-later services don’t charge interest, they don’t need to check that customers can afford to pay back their purchases before approving them for credit. A recent report by the financial advice site Money found that users aged between 18 and 24 owed the most on buy-now-pay-later services, averaging about £250 per person. Interestingly, Klarna fared better than other services, with those using Openpay, Zilch, and Laybuy owing more money.
In the same study, it was revealed that 18 to 24-year-olds were three times as likely to be wooed by an attractive social media profile, with 15 per cent stating that appealing ads were the primary attraction to buy-now-pay-later services. In December, the UK’s advertising watchdog banned an Instagram influencer ad for the service, which “irresponsibly” encouraged customers to use Klarna to “splurge” and cheer themselves up during the pandemic.
Amid mounting pressure, earlier this month (February 2), the UK announced plans to bring buy-now-pay-later companies under the regulation of the Financial Conduct Authority (FCA). As reported by The Guardian, regulation will mean that firms have to conduct proper affordability checks before lending, ensure customers are treated fairly if they’re struggling to repay, and give them the opportunity to complain to the Financial Ombudsman Service if things go wrong.
“I started to do a bit more digging, and put out a question via my newsletter. The next day, I was inundated with people sharing their problems and negative experiences” – Alice Tapper, #RegulateNowPayLater campaigner
The decision was welcomed by Labour MP Stella Creasy, who led the charge in parliament. “The FCA has confirmed what we have been warning the government of for the past year: that the behaviour of the buy-now-pay-later industry presents a clear risk to consumers and needs urgent action,” Creasy said in a statement. “The consequence of further delay could be catastrophic for personal debt, with 11 per cent of consumers saying they’ve used buy-now-pay-later since the start of lockdown, often due to the financial distress of COVID.”
News of Klarna’s regulation came after an eight-month campaign by financial activist Alice Tapper, who authored the 2019 book, Go Fund Yourself: What Money Means in the 21st Century, How to be Good at it and Live Your Best Life. Tapper’s campaign – spread via the hashtags #RegulateBuyNowPayLater and #KlarNAAA – started two years ago when she saw an advert for Klarna on the tube.
“I started to do a bit more digging, and put out a question via my newsletter, asking for people’s experiences,” she tells Dazed. “The next day, I was inundated with people sharing their problems and negative experiences.” Tapper says these complaints included falling victim to identity fraud scams, getting into serious amounts of debt, and using buy-now-pay-later accidentally and being faced with debt collectors.
26-year-old Jamie* used Klarna to buy some clothes he wasn’t sure he’d want to keep, and did end up returning them within 30 days, before his payment would even be due. “Klarna reminded me that a payment was coming up,” he explains, “but I’d returned everything so didn’t worry about it. A few weeks later, I received a letter saying my payment was late.” Jamie emailed Klarna, who said they’d look into it for him. “I logged into my account and the balance owed was zero, so I thought it was sorted and I left it.”
Months later, Jamie was faced with a letter from a debt collection agency, which he says just included “a nice big number and a threatening paragraph saying, ‘Pay now or further action will be taken’”. When Jamie contacted Klarna, they said they had no record of his return. However, after sending screenshots of emails and receipts, Jamie’s case was closed and he had no further contact with Klarna nor the debt collectors.
In a ‘mythbusters’ post on its website, shared last month, Klarna does say that accounts will be passed onto debt collectors if the money remains unpaid for “several months despite multiple payment reminders being sent”. Klarna previously told The Guardian that this would be a “last resort”, however – as with Jamie’s case – debt collectors appear to have been sent even while users were disputing returned items.
During email exchanges with Dazed, Klarna repeatedly asked for the names of case studies to respond specifically to complaints. As Jamie (a pseudonym) wanted to remain anonymous, Dazed couldn’t share his details, but asked Klarna to expand on its debt collector policy – particularly answer to why agencies were assigned accounts despite customers disputing the debt. Klarna said: “If there are any issues with a purchase, customers can very quickly and easily raise a dispute either on the Klarna app or via the web portal. When this happens, we immediately put a hold on payments and further action until the dispute is resolved.”
In an email statement to Dazed, the company says that it “wholeheartedly supports the regulation of the buy-now-pay-later sector in the UK”, adding: “We agree that regulation has not kept pace with new products and changes in consumer behaviour, and it is now essential that regulation is modern, proportionate, and fit for purpose, reflecting both the digital nature of transactions and evolving consumer preferences.”
Despite its supposed positivity towards regulation, Tapper says Klarna was “fairly hostile” to the activist when she first launched her campaign. “They disagreed with some of the statements that the case studies were making,” she tells Dazed. “They actually sort of threatened to take legal steps unless they were amended – however, that was soon resolved after I provided clear evidence that there was a basis to these claims.” Tapper reveals that “things settled down a bit” after MPs like Creasy got involved.
“It’s very easy for anyone to fall into the trap of feeling like your online shopping is free. You’re better off buying what you can afford, paying upfront, and not having to worry about it” – Jamie*, 26
“The objective was never to suggest that these products were all bad and couldn’t be useful for some customers,” Tapper continues. “But it was the hundreds of people who shared their stories with the campaign who made it painfully clear that the absence of regulation is at the expense of consumers, particularly those who are young and vulnerable. Shoppers as young as 18 have been advertised these products by influencers, with no risk wording – today, buy-now-pay-later is often a teenager’s first encounter with credit. Regulation means consumers will receive the information and protection they deserve.”
After his experience with Klarna, Jamie says he also welcomes regulation. “I know people who admit to having credit cards maxed out and are in their overdrafts, and they still use Klarna,” he explains. “It’s very easy for anyone to fall into the trap of feeling like your online shopping is free, forgetting about the later payment. You’re better off buying what you can afford, paying upfront, and not having to worry about it.”
While buy-now-pay-later services can be a valuable asset for those in a financial bind, Klarna’s model of advertising to young customers – and young women in particular – poses a stark threat to their future finances. Though many people have positive experiences with Klarna, some have been left with significant amounts of debt, tricked by the company’s appealing aesthetic, digestible feminist quotes, and #relatable memes. As regulation is imminent, Klarna’s baby pink mask has been torn off to reveal… just another bank. Scooby Doo eat your heart out.
*Name has been changed