From the moment Lily signed up to Klarna, she knew she didn’t really need it. The service, which allows users to buy items immediately and pay for them later, was a “lazy” way to shop online without thinking about the consequences.
“Klarna enabled me to buy things I didn’t need”, she told me, “because I didn’t have to think about paying there and then.” Lily used Klarna for only just over a year, but made purchases so regularly, she said it felt like she’d used it her entire life.
Lily felt that was Klarna was “legit” because it was everywhere. Since 2019, it’s been hard to visit a mainstream fast-fashion website and not be offered Klarna as a payment option. The sight of its bubblegum-pink logo was exciting to Lily. It became her mainstay, her primary payment method for nearly all her online purchases.
Then, in August, a few weeks after buying some clothes on Asos, Lily logged onto Klarna to pay for them. But despite repeated attempts at payment – what she believed was due to a technical glitch – the money wouldn’t go through. She got in touch with Klarna, explained the issue, and even arranged to send the £57 she owed via bank transfer. Once she’d sent the money, along with a confirmation of payment from her bank, she thought the problem had been resolved. But, four months later, Klarna wouldn’t accept that Lily had made the payment. She feels “disgusted” at what happened and is concerned at what an outstanding debt might mean for her financial future.
Lily’s story is not unique. The consumer website Resolver reported earlier this year that it had received 15,950 complaints about various buy-now-pay-later (BNPL) services in less than two years. Some users report being threatened with debt collectors for years despite sending money. Others report having their credit scores damaged by missed payments on sums of less than £100.
Klarna’s logo is increasingly inescapable when shopping online; the company reports that it is now used by more than 200,000 retailers in 17 countries, and its income grew 37 per cent in the first nine months of this year. But while Klarna is growing at a phenomenal pace, so too is the number of people – especially among the millennial consumers who made it popular – who no longer see it as a generous new friend, but as an old-fashioned lender.
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Klarna came to the UK in 2014, having launched in Stockholm in 2005. It expanded across the Nordics in the Noughties, then into Europe and the US. In September, in its most recent funding round, investors poured $650m into the company, giving it an estimated value of $10.65bn and making it the most valuable private fintech company in Europe.
Klarna is known in the UK for its BNPL scheme, which allows users to order items online without having to pay anything until 30 days after the transaction. It also offers, in some cases, the facility for users to pay off a purchase of any size in monthly instalments.
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Credit cards have long allowed shoppers to overcome the psychological “pain of paying” , but Klarna takes this further by offering quick, painless payment for small, individual purchases. Crucially, for clothes bought online, it gives a consumer the opportunity to receive and return any unwanted items within 30 days and not ever pay anything for them.
Klarna has become synonymous with fast fashion; its logo appears under every item listed on Boohoo, H&M, PrettyLittleThing and hundreds of other retailers. By removing the need for consumers to pay what many might consider an unethically low price at checkout, it makes fast fashion even faster. NastyGal, In The Style and Urban Outfitters have Klarna as a default suggestion under items as cheap as £6, offering the option to pay off the item at a seemingly trivial £2 per month.
While it’s clear from the outset what Klarna offers, its PR triumph is in persuading the user that it provides something other than a loan. Its branding is the antithesis of the corporate, sterile image of most banks. Klarna attempts to personify the millennial woman, as if it were a friend who wants to help you get your hands on those Missguided joggers. Its Pepto-Bismol colour scheme and fat, curly font place it alongside brands such as The Wing or Glossier. Its UK Instagram account has more than 141,000 followers, significantly more than the combined following of all the UK’s Big Four banks. Klarna subverts the image most financial services companies believe they should have – dull, trustworthy, reliable – and instead taps into what its core demographic wants: someone to help them have more fun.
But this reputation has also been achieved through appearing benign. It spent years positioning itself as a risk-free option. Its ads read: “no interest, no fees, never”, and maintains that it conducts “soft credit checks“ that do not affect a customer’s credit score.
But these assurances apply mostly to the users who will never need them – for whom Klarna is a convenient click rather than a way to spread payments. In the past 18 months, a handful of Klarna’s 10 million UK users have said that they have been impacted by the same financial problems they thought using Klarna would protect them from. A fight has begun to increase oversight of this new tech giant.
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The leader of that fight is Alice Tapper, the founder of Go Fund Yourself, an organisation dedicated to helping people improve their financial health. In July 2019, Tapper released a book of the same name, guiding readers through her best money practices. A dedicated financial campaigner for years, Tapper’s work exploded this summer after she launched a campaign against BNPL schemes, with a particular focus on Klarna (using the hashtags #regulateBuyNowPayLater and #KlarNAA).
The campaign is pushing to have these services regulated, as at present they are largely not, by the UK’s Financial Conduct Authority (FCA). Tapper says users of BNPL need more transparency about the impact on their personal finances if they miss a repayment on a credit agreement, and the public needs stricter rules on how BNPL arrangements are marketed.
The campaign also highlights the difference between what Klarna tells shoppers – that they can “sit back and relax” – and what it tells its retailer clients: that shoppers, on average, spend 55 per cent more if they use a BNPL scheme to pay in instalments.
Tapper has fought Klarna’s claim that its service does not impact users’ credit scores, publishing evidence that the company’s website has previously warned about the consequences of missed payments and noting that the fine print on retailers like Asos, H&M, and Missguided says that credit scores can be affected.
“These stories started to emerge from people who were getting in touch saying that they had gotten into financial difficulty – realising that they’d actually racked up quite significant sums with BNPL providers,” Tapper told me.
But she said another, more significant problem had emerged. “It was an operational issue – specifically, that people were accidentally using these products. This struck me as so shocking, that someone could accidentally end up in debt.”
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On many retail websites, BNPLs have become the default payment option. Without understanding the process, or the terminology used – in many cases without even noticing – shoppers can have their purchase accepted on credit at a single click. Tapper began investigating how this could be the case on so many sites and found that it was a regulation issue; an old law (the Consumer Credit Act 1974) still dictates how we use credit in 2020.
“The legislation is in need of updating,” she said. The campaign is “by no means saying that these products can’t be useful or used well, but simply need to be brought under FCA regulation like any other credit product”.
While much of the campaign focuses on getting Advertising Standards Authority (ASA) and the FCA to change their rules around Klarna and other BNPL schemes such as Clearpay and Afterpay, it also aims to increase public understanding of the risks of BNPLs. A study by Which? showed that 40 per cent of people who use BNPL schemes had no idea that missing payments or failing to repay might affect their credit, and another by Compare The Market found that 45 per cent of BNPL users last year had missed at least one payment (Compare The Market also emphasised that this statistic was before lockdown, and that the pandemic has led to a surge in people using BNPLs).
Tapper says the sites hosting Klarna and other BNPLs also have a responsibility to their customers. “We’re in a really unique and new situation in which retailers are having to communicate the risks of these financial products and they’re not doing that,” Tapper said. One sponsored post from fast fashion brand I Saw It First encouraged shoppers to use the BNPL scheme Clearpay with the message: “No money. No problems. It’s Clearpay Day…”
Tapper’s campaign has created a “best practice document” which outlines how responsible, consistent messaging from retailers helps shoppers avoid falling into debt. “Regulation takes time,” she told me, “and for now, the power is with retailers.”
Already the campaign is seeing results. Last week Asos, the UK’s biggest independent online fashion retailer, became the first brand to commit to Go Fund Yourself’s best practice document. And at the end of October, the FCA formally announced the start of the Woolard Review, which includes a look into the unsecured credit market, including companies such as Klarna. A blog post on Klarna’s website has since expressed support for the aims of the review. On 2 December, the ASA also announced new rules specifically for BNPLs that include a requirement for greater transparency on retailer websites and a crackdown on misleading marketing.
Tapper has already provided the Woolard Review with 46 case studies from people who have been negatively impacted by BNPLs in different ways, from accruing debt to using the products accidentally. She hopes these cases will help illustrate the urgent need for intervention. “In the current economic climate, where young people are mostly likely to be affected by unemployment, this has never been more critical,” she says.
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Klarna is one of a number of brands that millennial consumers are finding might not be as “friendly” or ethics-focused as their marketing suggests.
On 12 October, thousands of people reported receiving a marketing email from Klarna which they say they never signed up for. In a blog post, Klarna apologised for the mass email, calling it a “human error” and saying anyone who had recently used Klarna had been contacted. But this didn’t line up with many people’s history with Klarna (for example, I received it after having not used Klarna for a year) and the Information Commissioner’s Office (ICO), responsible for investigating data protection breaches, is currently looking into the case after receiving more than 90 complaints.
There is also the risk, for Klarna, that it could become associated with the human and environmental costs of fast fashion. A spokesperson told me that Klarna “became carbon neutral in 2019, and we have set clear additional sustainability goals for our business which we are actively working towards. We are proud to partner with many retailers dedicated to providing consumers access to sustainable options, such as EarthBits and Wholefood Earth. Our biggest marketing campaign of 2020, KlarnaSense, was specifically targeted at reducing impulse shopping.”
After Klarna was contacted for a response to this story, the company emailed Lily to say that it had now located her payment. It acknowledged that she had tried to pay multiple times but that authentication had not been possible.
But others say Klarna is for them an ongoing nightmare, in which they are plagued by accumulating debt, debt collectors, and a potentially impacted credit score.
And Lily, while she is “happy that this is now resolved”, says her confidence in quick, supposedly safe online payments “has been seriously dented”. She told me: “I’m never going to be using Klarna again.”
This article was updated at Klarna’s request to include a reference to Klarna’s blog post of 4 December.
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