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Delaying Payments – Klarna’s Unethical Trap

expensive luxury goods Chanel

Bankers. Let’s face it, they don’t exactly conjure up the mental image of the cuddly and caring type. Not quite the trust-worthy parent-figure. A warm and wise Fairy God-Banker, I think not. With decades of bailouts, scandals, manipulating small businesses and customers alike, I would hope that the average adopts a healthy dose of scorn towards banks and bankers. But any healthy distrust seems to have evaporated when it comes to the Swedish firm, Klarna. Klarna is now one of Europe’s largest banks, providing payment solutions for 90 million customers across 200,000 merchants in 17 countries. Customers have lapped up its flagship ‘pay later’ scheme, flocking to the service, and becoming the proverbial child in a sweetshop. As a payment option offered at checkout, Klarna allows customers to pay in delayed instalments, leveraging them into debt and encouraging overconsumption. 

What is Klarna?

Klarna was established in 2005 by Swedish entrepreneur Sebastian Siemiatkowski, and is currently valued at about $2.5bn (£2bn). It launched in the UK in 2017 and already sees 8.6 million active customers nationwide. The bank provides interest-free buy-now-pay-later options across a large range of eCommerce platforms. Typically, Klarna allows shoppers to pay in either 30 days’ time, with their bank or credit card, or across three equal instalments. Critically, the consumer pays no interest and the retailer foots the bill, paying Klarna up to 5% of each sale plus a fee. 

Klarna allows people who shop at ASOS, Topshop, and hundreds of other online retailers to ‘try before you buy’. Customers who are accepted for Klarna’s pay later service have 14 or 30 days (dependent on the retailer) to pay for their order. The idea is that customers receive a bulk delivery of clothing so they can try them on and return unwanted items – all before they are charged.

So why the concern? For some, Klarna provides a means to an end, helping to pay for an item before pay day, or in time for an upcoming holiday or event. For many, Klarna encourages a habit of instant gratification, incentivising excessive spending by obscuring the cost.

What’s the Risk of Klarna?

piggy bank

Buy-now-pay-later shopping is no new thing. However, standard economic practice tells us that tomorrow’s costs don’t seem as taxing to most consumers. Seduced by nefarious marketing, customers are told that they ‘deserve to treat themselves.’ They are convinced that they should ‘stay ahead of trends’. They are proscribed a dose of retail therapy. When making a purchase decision, most people tend to discount the future and its consequences. Tomorrow’s problems are nebulous to those indoctrinated with a YOLO mindset. A popular phrase in today’s vernacular is ‘that’s a problem for tomorrow me.’ 

As a result, we tend to see that anything we have to pay off down the line as representing less of a burden. Because of this, buy-now-pay-later schemes are very likely to encourage people to overspend. What’s more, with its pay-by-instalment structure, Klarna encourages people to purchase items that they can’t afford. It encourages them to buy in quantities they don’t need.

Encouraging Overconsumption

In 2017, Klarna itself commissioned a study with the University of Reading into online shopping behaviour. The report, intended for partner retailers, details how to persuade shoppers to make ‘emotional purchases’ over logical ones. It cites that the less a customer is required to think about inputting data (such as payment information), the more likely they are to make an unreasonable purchase. Reckless purchases only contribute to overconsumption. As unnecessary goods are sold to consumers, climate breakdown worsens, the planet’s life support systems are ravaged and air pollution increases. We only have to look to Klarna’s own statements – the bank markets itself to online retailers with the promise of a 20% increase in the number of sales. 

How Klarna Brands Debt to the Young

According to Finder.com, 37% of Brits say that they have used buy-now-pay-later schemes. What’s particularly striking is that these payment options are often targeted at younger shoppers. 54% of millennials (1981-1996) use this online payment method. Generation Z is following the same trend with 50% saying they use buy now pay later services. It should come at no surprise: Klarna and its competitors are all highly active on social media. They adopt a youthful tone of voice to court millennials and gen-Z users through organic and targeted ads. 

generation z

Over a decade on from the ‘08 financial crisis, and amidst the fallout of the coronavirus, a new generation are being targeted by lenders. These banks are using clever marketing to reframe the culture around debt and credit payments for the TikTok era. The ease with which young consumers can access credit services is of notable concern to the debt advice charity, Stepchange. “Credit should never be marketed as a flippant thing or something easy and convenient.” Even if a young customer does not default on their instalments, Klarna contributes to an insidious credit culture. The bank feeds the idea that debt is a practical means to purchasing a must-have item.

What are the Consequences?

If customers do default, Klarna may use debt collection agencies to recover any outstanding balance. Additionally, Klarna reports missed and late payments to credit reference agencies which will negatively impact their ability to obtain credit in the future.

If customers miss an instalment payment when using Klarna’s ‘Slice It’ service, they could be charged a late payment fee. They may need to start paying interest of 18.9% and they will have the transaction appear on their credit record. This would be condemning today’s youth to higher interest rates on any future loans. Bad credit would complicate the process of moving into a rental property. It could even cost them a job.

Young people are less likely to have experience or understanding of borrowing.

According to Financial Capability, more than a third (37%) of young people have taken out loans through credit cards, overdrafts or other sources. Yet over a third (37%) do not have a plan to repay these debts.

Making light of deferred payment services, or even positioning them as a credible solution, is an exercise in irresponsibility. It’s harmful to a vulnerable age-group who has less wiggle room should things go wrong. 

debt

Klarna doesn’t want its users to be too concerned about debt – that itself, is concerning. An ethical retailer aims for transparency – an unethical one encourages overconsumption by discouraging logical buying decisions. 

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