Why Klarna going contactless can only spell disaster

“It’s official! We are launching our own physical Klarna card in the UK!” reads an excited blog post about the arrival of a new contactless card that shoppers can use on high street. The as-yet-unregulated service, which lets you buy now and pay later, has been heavily criticised for trapping people in debt without them realising.

With its powder pink branding, snappy slogan of “shopping just levelled up”,​​ and accessible astrology-themed social posts, Klarna’s marketing very clearly targets young women. Lining the online checkouts of major fast fashion brands, it has positioned itself as a generous, helpful friend you can just pay back later (without mentioning the dangers of not paying on time). As one 24-year-old told us, “the branding is really clever as it’s deceivingly innocent for something that can actually get you into debt”.

The Swedish service, which launched in the UK in 2014, rose in popularity during coronavirus, becoming the fourth largest private fintech company in the world in September 2020. Previously, the service could only be used for online spending, but this new physical edition – in the option of either their staple pink or a slick new black – will allow shoppers to tap the card along the high street. Using the card, consumers can delay their payments for up to 30 days without incurring interest charges or late fees. Following the announcement, Klarna said it had built up a waitlist of 400,000 consumers in the UK.

The average consumer in the UK is currently being squeezed more than ever thanks to post-pandemic energy tariff hikes and national insurance rises (rather than, say, a wealth tax on the billionaire boom as a result of Covid). Tweeting about the news, MP Stella Creasy, who has been vocal about the dangers of Klarna and its competitors, wrote: “Whilst this Government eviscerates itself, these new legal loan sharks exploit the cost of living crisis – am determined to keep shouting about this until that changes!”

Presumably in a bid to avoid this sort of scrutiny, Klarna’s new card advertises measures that appear to advocate conscientious shopping. One feature promises to daily “re-evaluate how much you can spend to ensure we are lending responsibly and protects all our consumers from overspending”, while a “realtime spending updates” feature also claims to offer transparency when making purchases. It also states, slightly patronisingly, that “bank statements can be difficult to read, do you really know what you spent your money on?” But these supposedly helpful ideas become meaningless when users simply miscalculate their in and outgoings and can’t make their payments. As reported by New Statesman, users described being threatened with debt collectors despite making their payments, while others said their credit scores were damaged by missed payments of less than £100.

“Klarna can be useful if you use it with your eyes wide open,” Laura Whateley, financial expert and author of Money: A User’s Guide, acknowledges. “Borrowing with a credit card or payday loan can be extremely expensive, with interest rates sky-high. If you can genuinely afford, and are organised enough to remember to repay a buy-now-pay-later shop on time, then it can be a lower cost way to manage cash flow, useful if you’re self-employed, for example, and don’t always get paid promptly, or you have a big event like a wedding on the horizon.”

But in reality, she continues, “lots of people may get to the end of the month and realise they can’t actually afford what they’ve bought on buy-now-pay-later, or because life gets busy, forget to pay what is owed. In the worst case this can lead to you damaging your credit file, making it difficult to borrow money or get a mortgage in the future. Buy-now-pay-later can contribute to people getting into a spiral of unmanageable debt, which can be a very distressing and expensive experience.” 

“Buy-now-pay-later can contribute to people getting into a spiral of unmanageable debt, which can be a very distressing and expensive experience” – Laura Whateley, money expert

Whateley also points to the evidence that “the easier it is to pay for something, tapping with a contactless card, never handling notes or coins, the less we think about whether we can afford, or even really want, what we’re buying. Buy-now-pay-later makes it as frictionless as possible which can tempt us into busting our budget at a time when the cost of living is rising, and most of us need to hang on to as much of our earnings as we can.” 

According to the Guardian, Klarna has said that customers will receive a personalised cap on their spending if they qualify for the card, which will be adjusted automatically after every purchase based on their financial track record, but it’s difficult to trust a service with an entire business model built on encouraging people to spend beyond their means.

Whateley advises any users who are considering Klarna to “go into using any credit product understanding that’s what you’re doing, the implications of not being able to pay on time, and what it might mean for your future finances and bill payments. It can be necessary and convenient, but always ask yourself why you’re using credit rather than cash, before you tap to buy.”

In response to this article, a spokesperson for Klarna told us that their “biggest marketing investment last year was KlarnaSense, targeted at supporting responsible spending and reducing impulse shopping and for the last two years over 50 per cent of our marketing investment in the UK has been on financial wellness. In our app we offer customers a budgeting tool, provide a spending limit, and monitor behaviours like late-night spending. We also have a Financial Wellness microsite and blog called Mindful Money with information on how we help customers spend responsibly and broader measures they can use to take control of their finances.”

The company denied that it allowed or encouraged irresponsible lending, saying “we restrict the use of our services after missed payments to prevent debt accumulating, we conduct strict checks each and every time someone makes a purchase so we only lend to those who can repay, and we don’t provide a huge credit limit – we release small amounts of credit and that only gets increased gradually if customers can show they can shop and repay responsibly. We don’t charge interest or fees to consumers so we have no incentive for them to be in debt – quite the opposite. We work with our customers to make sure they can repay in a way that’s most comfortable for them based on their current situation. If someone’s circumstances change, we have specialist support available (including 24/7 chat on our app or over the phone) and we help those people come up with a payment plan to get them back on track.”

Addressing the idea that the company encourages users to spend beyond their means, the company said, “The vast majority of our customers pay on time and in full as seen by our low loss rates, at less than 1 per cent, which are 30 to 40 per cent below industry standards and that of credit cards. In fact, in the UK around 40 per cent of our customers pay us back ahead of their due date.”

Although it said that Klarna did not threaten customers with debt collection, it stated that: “we only turn over debts to a collections agency as a last resort if repayments aren’t met and after several additional reminders with customers not responding after a long period of time. We make it clear in our terms and conditions that if payments cannot be successfully made we might use a debt collection agency to collect the money for us, but we will always attempt to get in touch with the customer multiple times before doing so.”

Klarna also refuted the idea that their BNPL products affect customers’ credit scores (although a Which? report states that with schemes like Klarna, “failure to pay back what you owe (known as defaulting) can be noted on your credit report and the mark can stay there for six years”. They also said they “welcome regulation of the BNPL sector – here is our blog outlining our full position.”