A look at buy now, pay later systems, how they’re taking off around the world and what you can do to manage your credit with global provider Klarna.
Buy more with less (or nothing) and spread your payments out over a term that suits you. Buy now, pay later sounds like a credit card, only more flexible, and there can be bigger benefits too, like no interest or fees. These schemes have become the hottest thing in online shopping, particularly targeted at procrastinating millennials who can’t make up their mind if they should buy that bag, jacket or pair of shoes they’re salivating over in their favourite digital shop.
Forget PayPal, debit cards and other ways of paying for products and services online. Buy now, pay later is big business and getting larger by the day. It’s the fastest-growing payment system in the UK, with 37% of British people using a buy now, pay later service when they shop online, according to research by comparison site Finder. More than half of users (54%) were millennials — broadly defined as people born between 1980 and 2000 — and the majority said they used such services for ease and convenience.
The survey also found that buy now, pay later solutions were growing at the astounding rate of 39% per year. They got a big boost during pandemic lockdowns in 2020 when more people than ever shopped online because they could not travel to their favourite stores or because those stores were closed.
There are lots of buy now, pay later providers. However, Swedish firm Klarna Bank AB, or just Klarna, is arguably the global leader, with a record 87 million people around the world using the service last year and handling 1 million transactions every day.
“The last year has created unprecedented change in the global economy, which has transformed how consumers bank, shop and pay,” said Klarna co-founder and CEO Sebastian Siemiatkoski in announcing 2020 financial results in February. “Klarna has adapted well, supporting retailers to move online at pace while continuing to provide consumers with superior shopping experiences and payment options that meet their evolving needs.”
How Does Klarna Work?
Klarna says it’s the easiest way to get what you want right now — assuming you don’t have the cash to pay for it or would prefer to pay in instalments. There’s also absolutely no catch, such as getting bills that shock with high interest and fees, as can often be the case with credit cards. Klarna has formed agreements with all kinds of online stores — everything from fashion to phones, home decor and much more. You simply access them by using the Klarna app.
The app offers discounts and deals on products, plus tips relevant to individual users and the ability — and freedom — to decide how you want to pay. If that wasn’t enough for happy online shoppers, Klarna also has a rewards system called Vibe, which gives you a welcome cash reward as well as rewards on purchases across an array of items.
Once you have your purchases, you can use the app to make your payments. You have the option of paying four times every two weeks, paying in 30 days or financing over six, 12 or 36 months. The choice is yours and you can simply use a credit or debit card to pay the instalments or lump sum. The company may carry out what’s known as a soft credit check on new account holders. It may look at your credit history to see how well you’re managing your finances, but this check won’t impact your overall credit score. A hard credit check might be done for financing options, however.
Why Are Buy Now, Pay Later Systems Attractive to Retailers?
Apps that let people buy now and pay later are, unsurprisingly, great for business because the payment barrier is lifted. They can drastically improve an online retailer’s abandoned cart rate, which research found was a staggering £24 billion in 2018, representing 7% of all online sales that year.
The financing options offered by buy now, pay later firms gives consumers more purchasing power and companies more sales, Klarna says. They result in, on average, a hefty 58% increase in order value and a 30% boost to conversion rates — meaning tons more sales for all kinds of companies in the eCommerce sector.
Other benefits of this method of paying for items online include increasing the customer base and carving out a greater market share — something every company wants, but that is a complex, time-consuming and often expensive undertaking. But with buy now, pay later, more people are attracted to your online store because they have an easy payment choice.
Equally important is enjoying repeat business from buy now, pay later customers, as they find it highly convenient to shop this way. Companies also get paid and avoid fraud and other risks, as the payment providers take on those responsibilities. And this system fuels the pervasive instant-gratification desire in an always-on, instantly connected society where few want to wait around for something when they can have it now. Klarna and other buy now, pay later apps allow people to shop today for what they want and pay tomorrow.
What Does the UK Government Say about Buy Now, Pay Later?
Unlike other financial products and services in the UK, buy now, pay later is not regulated by the Financial Conduct Authority, but change is on the way. In February, the government said that while buy now, pay later services could be beneficial for people, it was taking action to ensure consumers were protected after it found there was “potential for harm”.
The government said the sector would be regulated by the Financial Conduct Authority, an independent government agency with powers to investigate companies and issue fines because the scale of transactions — “tripling in 2020 as the pandemic drove online shopping” — meant there were “significant” risks to consumers.
“Buy now, pay later can be a helpful way to manage your finances, but it’s important that consumers are protected as these agreements become more popular,” said Economic Secretary to the Treasury John Glen. “By stepping in and regulating, we’re making sure people are treated fairly and only offered agreements they can afford — the same protections you’d expect with other loans.”
The government found that although people may be using services like Klarna to buy items online that are relatively low in value, some people use a number of buy now, pay later apps to shop and so “it would be relatively easy to accrue around £1,000 of debt that credit reference agencies and mainstream lenders cannot see.” It also explained that the risks to consumers were increasing because some buy now, pay later services were planning to offer higher-value items from retailers.
So How to Manage Your Credit with Klarna?
If you have payments due to Klarna fast-approaching and you’re worried you might not have enough funds to meet an instalment, there is some flexibility to give you peace of mind. With the 30-day payment option, for instance, you can change the scheduled payment date. If you’re paying through financing, you can make a payment from the 2nd to the 26th of each month to ensure the minimum amount is covered and you don’t run the risk of being overdue.
If a scheduled payment is due and Klarna attempts to collect it and fails because there isn’t enough money or credit on a card, it will try again — and you’ll be notified by email that the first attempt was unsuccessful. If collection fails the second time, a late fee will be due for accounts that pay in four instalments — the equivalent of £5. But the late fee jumps to the equivalent of £24 for financing accounts where the minimum payment is not met every month.
What happens if you accrue too much debt with Klarna and are struggling to manage it? If you find you’ve ordered too much and your payments have ballooned and you perhaps cannot afford all the repayments, it’s good to talk to someone rather than becoming too stressed and wondering how to cope. Start with Klarna itself; the company understands people’s finances and is certainly willing to help those who find themselves in financial difficulty.
Klarna offers customers comprehensive support regarding the items they’ve purchased and if customers encounter trouble meeting their payments. The company has partnered with the Campaign Against Living Miserably (CALM), a charity that provides a free helpline seven days a week for people who need to talk about any problem they’re having. Above all, Klarna says it’s vital to do something if your debt is out of control and negatively impacts your life.
“Do not ignore the problem,” Klarna advises. “We’re here to help and we encourage you to explore the diversity of resources available that might help you to regain control.”
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