Buy Now Pay Later: Is Klarna The New Millennial Debt Trap?

Updated: May 11

The buy now, pay later economy goes hand-in-hand with fast fashion, but the environment is not the only loser. In the wake of the coronavirus, a time where online shopping has snowballed, young people have found themselves drowned by debt.

Klarna, the Swedish, pink-branded startup offers a “try before you buy” experience, in which shoppers can have clothes, shoes and furniture delivered without needing to pay upfront. There is no interest, no hidden fees, and users get 30 days to either send the items back or pay for them in full. If you are on a tight budget, using Klarna means you do not have to wait until payday to stump up the money for clothes you need now. “No drama, just Klarna”, as the brands pithy slogan would have us believe.

The Guardian recently reported that, as of 2021, one in every ten customers who rely on these services are in arrears. So, it is no surprise that The Treasury announced plans to bring Klarna and other buy now, pay later companies under the regulation of the UK Financial Conduct Authority. The report also showed that while most shoppers only spend on average £65 to £75 per purchase, it is not uncommon for customers to use more than one buy now, pay later provider to cover the cost of one single transaction.

More alarmingly, the number of customers signing up for credit options has quadrupled in recent years and whilst companies like Klarna run basic soft credit checks, there is no way for multiple debts to be flagged to lenders. This raises the question of whether users can really afford what they’re signing up for.

So how does Klarna make money? They have three products that they offer; 30-day payments, instalment payments and the big moneymaker, financing. Financing is for products where the cost is split between 6-36 months and the consumer can be charged up to 18.9% APR. Furthermore, their brand partnerships are another revenue source as they make a commission anytime you purchase from the retailer using Klarna. This is an effective business model as consumers are likely to buy more if the money isn’t immediately leaving their bank account.

Klarna claims that they are “For a generation of shoppers who have turned away from traditional forms of credit such as high cost credit cards”. What Klarna forgets to mention is that other reputable lenders regularly turn away these types of customers for a reason - they are unreliable and can’t afford the repayments.

The way brands are approaching young people to adopt this buy now, pay later model has changed. In the early 2000s, young people were targeted in stores, with brands like New Look, Topshop, Argos and thousands more offering store cards and store credit. Now, the physical swiping and paperwork associated with store credit has been removed from the transaction. This makes young people who are newly experiencing financial freedom vulnerable to a financial culture where money is literally invisible.

As the leader in its industry and a brand that almost exclusively targets millennials and Generation Z through its advertisements and brand collaborations, it is entirely appropriate for Klarna to be put under the microscope. While most people would like to think they are smart enough not to buy clothes that they don’t need or can’t afford, it is easy for young people in their twenties to be seduced by Klarnas fluffy branding.

The UK Managing Director of Klarna has previously denied accusations that the company’s business model encourages young people to take on debt. Klarna does not charge any late fees and when a shopper has trouble paying once, they ban them from using the service again, an unusually moral business practice in the world of finance. The brand strongly emphasises that it communicates with customers and makes an effort to educate them on their financial choices. But we all know that a person only needs to make one buy now, pay later purchase to be trapped in debt for years to come.

Klarna perfectly complements the fast fashion industry because it removes one of the largest obstacles young people face in the quest to be trendy – affordability. Buy now, pay later schemes encourage the throwaway nature of high-street fashion and peddle clothing as an urgent need rather than a long-term investment. Unlike buying clothes upfront, it is virtually impossible to gauge how much you are spending. When the money doesn’t come out of your bank account straight away, it takes a financially comfortable, responsible and educated person to pay it back on time – but few people are this way inclined in their teens and early twenties. It may be cynical to suggest, but that may be what Klarna is counting on.

Words: Emma-Marie Smith, Artwork: Natasha Cassidy

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