The ‘Buy Now, Pay Later’ Dream For The Millennial Generation
Klarna: Free Credit For Online Shoppers That Isn’t Quite as Free as it Looks
There’s a new player at your online checkout and it’s ruffling feathers with both its users and financial experts alike.
Klarna is a new payment method instigated by Swedish entrepreneur Sebastian Siemiatkowski, and is now available at hundreds of online stores, including Asos, Schuh, JD Sports, and Topshop, to name but a small selection.
It seems like the perfect way to shop online: order all the items you’d like to try, have them delivered, see what you like and don’t like, and simply send back what you don’t want without paying for a single thing—sounds too good to be true, right? Well, if you play by the rules (of which there are a healthy selection) then you’ll do just fine.
By operating within Klarna’s regulations, you’ve got between 14 and 30 days to return any of your items, and only then do you pay for the ones that you choose to keep.
Where once you had to pay for your item, find out that it didn’t fit on its delivery, return it and wait for your payment to be credited before being able to order the next size up or down, now you can order 3 or 4 sizes all at once, at no charge, and only pay for the one that fits. Simple!
What if you’re going to a wedding and you can’t decide what to wear? You can now choose several outfits, take them all with you, decide on the day which one is the ideal choice, and only pay for that one. Perfect!
Still sounds too good to be true, doesn’t it?
So, where’s the catch?
If you fail to return your items and let’s face it, we’re all human and infallible, then you’re committed to paying the total amount processed at checkout. That’s a lot more than most shoppers anticipate spending.
If you miss the due date required to settle your bill from Klarna’s emailed invoice, they will try to help you settle your account over the next 120 days—after that point, if you’re still struggling to pay what you owe, the full debt is referred to a debt collection agency.
Although there’s no interest, no credit, and no fees when buying with Klarna, things do turn sticky if you can’t pay. The soft credit check that doesn’t show on your credit score, the one they undertake to accept you into their system, turns hard and is added to your credit report. If you choose to opt into their split payment system (with their associated interest rate, obviously) to pay off your debt over a fixed time, that does feature on your credit report; and if you miss your payments, they will appear there too, and we all understand now that a poor credit score will cause detrimental effect to any further credit applications.
Klarna credit — Slice It!
‘Slice It’ is a Klarna product to help split those troublesome payments over a term of between 3 and 36 months. Good old-fashioned credit nicely disguised behind Klarna’s helpful and customer friendly expanded shopping services. Just like your old store cards, Klarna will reap its designated 18.9% interest rate for your convenience.
If you miss your Slice It payments, just as with traditional credit lines, you’ll be fined for each failure with a £12 per letter warning, along with the late payment fees.
A soft credit sell designed for the millennial generation
Out of all applicants to use the Klarna system in the UK, around 75% are accepted and the majority of these being late-teens and early-twenties shoppers. It would appear that a generation who consider credit cards and overdrafts ‘real credit for grown-ups’ are more than willing to enter into this alternate route of spending money they don’t have under its promise of being a fabulous and frictionless, free service.
And spend they will
Reports and interviews all over the internet and social media are presenting many cases of shoppers finding the ease in which they can spend, tipping them into a situation where they’re buying more than they anticipated, creating poor consumer habits and bad money management.
Where once, they may have contained their spending to what their budget would sensibly allow, this easy access to accidental, and encouraged ordering, is pushing some spenders to the edge of their limits.
Many users have claimed that they ‘forget what they’ve ordered’, ‘didn’t notice the invoice amidst the many emails sent by the company’, and ‘slipped into a spending spiral, ordering similar amounts month-to-month, as soon as they clear their account’.
Even when they haven’t found themselves in financial trouble, many certainly seem to have developed an unhealthy shopping habit nudging them out of their comfort zones.
It’s becoming a very big business
To show how they’ve boosted their company value to £2bn, by tripling last years sales to £29m, Klarna have shared figures that the retailers who have engaged with them have increased store orders by 30% and the average spend of those orders is up too, by 34%.
The transaction fees received from the merchants is how Klarna makes its money, and with the increase in spending, it’s great business for both parties.
With statistics on their growth, Klarna reported 9 million new users in the first 6 months of this year, creating a grand total of 60 million throughout Europe and North America since its launch in 2015. With 25,000 new UK users each week, things are looking stronger and stronger for them, and for the retailers buying into the system.
Friend or Foe? It all depends on how you use it
Such a new system will take time to establish how many of its customers can safely handle the choices on offer to them and function within both their own financial constraints and that of the company’s regulation.
Financial authorities and debt experts are treating this as any other credit system; albeit seeing how it’s found an excellent method of getting a foot through the door with a susceptible and unsuspecting market. They believe it’s not promoting healthy habits of saving, living within a manageable budget, but promoting piggybacking payments from one payday to the next.
Buyers that slip into this frictionless shopping experience yet end up sliding into debt problems instead are leaning on family, friends or other alternative methods of getting out of the trouble they’re finding themselves in.
As with any spending habit, credit, or money management, they’re only as dangerous as the hands they’re in. With a little discipline and careful spending, Klarna offers a fantastic free system with a wide range of benefits to its users.
For those who are perhaps a little more impulsive or can’t bear to part with those shiny and beautiful things, they don’t want to have to send back? Maybe it’s time to find a budgeting app for your phone, to keep things in check, instead.
If you are struggling with any kind of debts give one of our friendly advisers a call on 0808 2234 102 to discuss what options are available to you.