Khadra Mohamed examines the rising popularity of ‘Buy Now, Pay Later’ service provider, Klarna, as well as the implications this trend could have on young people's relationship with debt.
‘Buy Now, Pay Later’ has become a recurrent phrase in adverts, and has even become an option that many of us can opt to use when shopping online. Klarna has dominated this area as of late and has maintained this dominant market position even in the current tough economic circumstances.
Klarna is a Swedish buy now pay later platform. It has steadily expanded into America and the UK, where it has rapidly increased its profile and now facilitates payments for popular retailers such as Boohoo, Pretty Little Thing, ASOS, SCHUH and Nike. Due to its expansion and profitable partnerships with companies it has built a global customer base.
Not only is Klarna Europe’s first private fintech start-up, it is also the fourth largest private fintech firm in the world.
Online sales across UK and the rest of Europe have increased up to 129% (Internet Retailing, 2020), showing online shopping to be experiencing substantial growth despite restrictions and a shrinking economy. Furthermore, 29 billion pounds of transactions are processed by Klarna whereas platforms like WePay lag behind Klarna in all market share segments highlighting Klarna’s dominant presence. For example, across the entire web only 0.002% are using WePay and is only dominant in Cameroon whereas Klarna leads in over 140 countries showing the growing global success of Klarna.
Furthermore, Klarna at its core has remained customer-centric and built an inclusive customer brand with a focus on benefits for customers, unlike other buy now pay later companies. The Klarna app enables customers to shop while sticking to the same pay-later service ensuring customers stick to using Klarna, indicating how their success is built on continued customer loyalty.
Unlike other similar firms, Klarna does not charge customers interest instead charges retailers, making Klarna the preferred option instead of ClearPay and Afterpay. By offering a ‘simpler’ alternative to credit cards, Klarna has been able to define itself as the best Buy Now Pay Later option. With a flexible payment schedule and no impact on customers’ credit score, this has become so sought after that Klarna has 90 million customers worldwide.
Klarna’s success has not been without some criticism however, with many customers arguing that it is too easy to lose track of shopping and payments and debt charities arguing that it encourages reckless overspending and is reminiscent of payday lending.
This paired with Klarna’s young customer base creates a precarious outcome, with many debt charities arguing that that many young people become stressed about making payments. The Financial Conduct Authority is also examining the Buy Now, Pay Later which is a part of the unsecured credit market as many customers are often unknowingly run up huge debts using these services. Which leads to disproportionate effects on vulnerable customers, therefore policy intervention is necessary to minimize risk for customers and increase responsibility of firms like Klarna.
The use of an automated algorithm and a soft credit check has resulted in some heavy financial losses, for example $60.6 million was lost in the first half of 2020. The losses incurred doubled in the first half of this year showing how there is some risk to the increased options and flexibility that Klarna offer.
Klarna has essentially redefined paying for items online and has enabled customers to feel a safety net when paying for items that may be outside of their budget. However, some customers have reported increased stress and worry about their over-reliance on buy now pay later schemes. But Klarna has argued that within the algorithm, there is an affordability checker conducted every time a customer makes purchases and that customers can be stopped from using the service, showing Klarna to be taking an active role in preventing people who may be more likely to fall in debt.
The U.K.’s Advertising Standards Authority launched a probe into Klarna’s marketing practices last month, suggesting that there may be some hurdles for this fintech startup before its IPO is finalized.
On average, every 1.3 seconds a Klarna order is made and there are 1.6 million customers in the UK, indicating that Klarna has secured itself as a global customer brand despite some of the backlash it has received.
However, one question that remains is whether intervention is needed to regulate these Buy Now Pay Later schemes and if so, to what extent? This is one question that may be answered soon by the reports that will later be published by the UK’s Advertising Standards and The Financial Conduct Authority.
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