Klarna is a name that you may have seen appearing with increasing frequency if you shop online these days. It’s a new type of financial service that offers the option to try before you buy – and pay later. A number of big retailers, including JD Sports, have begun to offer this type of finance to customers. However, they have been warned that the result of doing so could be to push customers into debt. So, is the new service a convenience for customers or simply a debt trap?
What is Klarna?
It’s a Swedish bank that started trading in the UK in 2015. It has done incredibly well – H&M bought a 1% stake in the bank for $20m, making Klarna one of those elusive types of tech startup: a unicorn (i.e. worth more than $1 billion). So far, Klarna has established partnerships with some of the biggest names in online shopping, including Topshop and ASOS. Its financing is designed to overcome one of the biggest bugbears digital shoppers have: the time it takes to process refunds. Many online retailers now offer free returns in an attempt to tap into the practice among younger shoppers of ordering large volumes of items and then returning a lot of it. With Klarna, there’s nothing to pay up front. Instead, the customer can order as much as they want to and, as long as it’s returned within 14 or 30 days (depending on the retailer’s terms), no payment will be taken at all. Only the items that are kept have to be paid for.
Does Klarna credit check?
Yes they do. But they only carry out a “soft” credit check so between 70% and 80% of applicants are accepted in the UK. The firm will check personal details and then look at whether an individual has had any repayment issues in the past. If not, credit is approved. This may sound ideal for enthusiastic shoppers but as one Twitter user pointed out “it’s fine until you realise you owe them £200.” Klarna does say that they don’t charge interest or fees on amounts that are not paid within the 30-day repayment period. They have said that they will “work with” a customer who is having repayment issues to try and help them get back on track. And any customers who have problems with Klarna won’t be allowed to continue to increase what they owe.
However, the reality is that if Klarna customers can’t afford to make repayments on what they have racked up with a retailer they have just 120 days to pay the bill after the initial “try or buy” period expires. After that their account is passed to a debt collection agency and a whole range of charges and fees could start to apply. There may also be an impact on the individual’s credit score and this could be the start of problem debt for many. That’s especially so for younger customers in their late teens or mid 20s – consumers who may not have that much experience with financial matters.
Easy access credit issues
Minimal credit checks mean that it’s all too easy for anyone to obtain credit with Klarna. This is especially objectionable as it comes at a time when we are already in the middle of a mounting debt crisis affecting many consumers in the UK. However, the big issue with Klarna is the fact that it is targeting so many younger consumers as a result of the stores that it’s choosing to partner with. As many debt charities have pointed out this approach does not encourage budgeting. Instead, shoppers are encouraged to buy what they want now and pay it off at a later date. This is an attitude that has led many consumers to buy more than they can afford and to end up in a position where they are stuck in a cycle of repayment for something that they didn’t really need.
Although Klarna has emphasised that it has affordability checks in place these are quite basic. And, as Iona Bain, founder of the Young Money Blog, says
“my experience tells me that young consumers aren’t great at focusing on the details when it comes to debt… Unless you’re keeping a very close eye on liabilities like these, the risk that they get out of hand is very high indeed.”
Your Money Blog
More than a million people have already used Klarna’s service this year and interest in it as an option is increasing. Given the heavy weight of debt already shouldered by many UK consumers it’s worrying that this type of easy access credit could expose much younger generations to a potential debt trap.
Alex Hartley is a keen advocate of improving personal finance skills. She's worked at Solution Loans since 2014 and written hundreds of articles about how people can manage their money better. Her interest in personal finance goes way back to...Read more about Alex Hartley