Global retail bank, payments and shopping service, Klarna, has officially launched in Ireland. The ‘buy now, pay later’ (BNPL) giant announced its entry into the Irish market on Tuesday 9 November, releasing a press statement in which it said it sought to empower Irish consumers “with a better shopping experience and greater control, transparency and choice over how they pay”.
Using the Klarna app, Irish consumers will be able to ‘Pay in 3’ at any online store, regardless of whether they are a Klarna retailer or not, through Klarna’s ‘Shop Anywhere’ function.
BNPL schemes have rocketed in popularity with consumers in recent years. However, critics argue that the system, which allows users to pay in instalments, drives many into an endless cycle of debt. The colourful, social-media friendly Swedish fintech company is leading the BNPL race at present, with around five million people using its services last year, spending an astronomical £2.7bn (€3.1bn) in total.
Klarna has become Britain’s biggest BNPL firm, and has grown quickly to become the most valuable financial technology start-up in Europe, with a valuation of $46bn (£34bn or €38bn) and a string of starry celebrity brand partnerships under its belt. Its innovative advertising campaigns have featured the animated character Pingu, and it boasts marketing deals with the likes of Lady Gaga and Queer Eye’s Tan France.
Despite Klarna’s undeniable appeal and a vast international expansion which has now reached Ireland, sceptics worry that those partaking in BNPL spending sprees, as a result of easy credit offered to them online, have been plunged into mounting debt – after a boom in online shopping induced by a string of lockdowns since March 2020.
As the popularity of BNPL loans continues to grow, these emerging financial products have caught the eyes of regulators. A regulatory crackdown looms in the UK, and cannot come soon enough for financial and marketing experts concerned about the uncomfortable impact of BNPL schemes and the way they are advertised to young consumers.
In October, incoming regulation prompted Klarna to tighten its UK credit checks. Klarna said a new tool will allow users share income and spending data from their bank accounts to determine whether they can afford future repayments. A Klarna spokesperson said the feature is voluntary.
Unlike banks and credit card providers, Klarna doesn’t carry out hard credit checks on its customers, meaning their credit score shouldn’t show up on their credit history.
As reported by Gript, a review by the UK’s Financial Conduct Authority (FCA) earlier this year found that Klarna users could easily spend more than £1,000 online with few checks on whether they could actually afford the repayments. Christopher Woolard, who led the study, said the use of buy now, pay later schemes quadrupled between January and December 2020. Typically, 75 percent of users were female.
Further, a Citizens Advice poll carried out in the UK in September sparked concern, concluding that 10 per cent of BNPL customers had been chased by debt collectors after using the service. The poll, which surveyed 2,000 BNPL users, found that 9.7 per cent of customers had been followed up by debt collectors, with the figure rising to one in eight users of the service in the under-34 age group. Research carried out by the statutory body also found that young people using BNPL schemes such as Klarna fail to realise they are taking out loans, and have quickly fallen behind on payments, leading to contact with debt collection agencies.
The poll found that, of those referred to debt collectors, 96 per cent reported it caused them sleepless nights; to ignore correspondence; to borrow money to repay the debt; or have a detrimental impact on their mental health.
Four BNPL companies contacted by the charity – Klarna, Clearpay, Laybuy and Openpay – said they referred customers to debt collectors as a “last resort”. Research by Citizens Advice also revealed that shoppers were charged a staggering £39 million in late fees over the last year.
Citizens Advice carried out ‘Mystery Shopper’ tests which found that only 11 per cent of BNPL schemes warned shoppers they were entering into a credit agreement; 89% of BNPL agreements only mentioned it in the small print of their terms and conditions.
Citizens Advice called for companies to be more upfront with customers that are entering a credit agreement when using the BNPL service. BNPL services and apps, such as market leader Klarna, allow customers to purchase items and pay back the cost in interest free installments – but only if they keep up with the payments.
Millie Harris, a debt adviser of Citizens Advice East Devon, commenting on the research, wanted that people need to be aware that “there are going to be consequences” if they are not able to pay back what they borrow.
“My concern is that people aren’t processing the fact that BNPL is credit. They don’t realise there are going to be consequences if they don’t pay – it gives them a false sense of security.
“I’ve seen people using it for their kids’ clothes and shoes that they would otherwise never be able to afford. They are taking out what is effectively a loan, but they don’t see it as one. For example, I helped someone who has tens of thousands of pounds of debt, but they don’t see BNPL deals as part of that total. It’s almost under-the-radar debt,” Ms Harris said.
It’s a warning that critics can only hope will be heeded by Irish consumers as Klarna enters Ireland.