Klarna’s tempting trap
IF YOU are older than about 30, you have probably never heard of Klarna. But for millennials, it is one of those firms, such as Google and Hoover, that is so widely used it has become a verb.
For the uninitiated, Klarna is a ‘buy now, pay later’ operation, founded in Sweden 15 years ago that, ostensibly, makes online shopping smoother.
There are three options. ‘Try before you buy’ gives customers up to 30 days to pay, meaning if they don’t like what they’ve ordered they can return it, having paid nothing. There are no fees or interest charges on that facility, and it’s easy to see the appeal to cash-strapped young people.
Another option is to split the cost into three monthly instalments, again with no interest or fees.
Then there is a ‘financing’ option for bigger ticket items, with repayment periods ranging from six months to three years. Depending on the store, there may be an interest charge.
What’s the problem? Well, provided Klarna is used with iron self-discipline and good sense, then there isn’t one – though young adults short on cash are not exactly famous for their unwavering impulse control. Nearly 60pc of Klarna’s UK users are under 35.
A quick look at Twitter tells a sobering story. ‘This buy now, pay later with Klarna is dangerous,’ says one tweeter. ‘Worst company I’ve ever dealt with,’ posts another. ‘Wish I could Klarna a night out,’ is a repeated refrain.
One worried mum tweets: ‘Why was my 14-year-old daughter able to open a Klarna account without any security checks resulting in her being sent a letter threatening debt collection? Yet I can’t speak to customer service to sort it out because she, a child, has to give her consent.’
Klarna says the case has been resolved and the tweet taken down. Even if this episode is untypical, it is disturbing. T
HERE is also something unsettling about young adults using ‘pay later’ schemes for low-priced fast-fashion. Individually, a skirt costing £10 and a top for £15 may not be much, but collectively they add up. It can be easy for inexperienced twentysomethings to become overwhelmed and find the debt collector at the door.
Far better for the environment, too, if the temptation to Klarna another new dress were not put in their path.
Chief executive Sebastian Siemiatkowski claims there is a low default rate and that his company provides better value than credit cards.
That may well be right, but it is not the point. Klarna’s business model is predicated on tempting users to spend more than they otherwise would have done.
It makes money from transaction fees paid by shops. Those stores need to see their sales go up to make it worth their while dealing with Klarna, which has signed up 4,500 UK retailers. Interestingly, several of the companies that have defied the retail gloom – Boohoo, Asos and JD Sports – are in the Klarna zone.
Klarna is growing rapidly, adding millions of customers a year. It has some heavyweight backers, including Sir Michael Moritz, the world-renowned British venture capitalist, who sits on the board. Other shareholders include private equity firm Permira, fastfashion chain H&M, card payments giant Visa and Snoop Dogg, the rapper.
A funding round last summer valued Klarna at around $5.5bn and it is widely expected to float on the stock market at some point, probably in the US.
No doubt its investors will be able to cashin handsomely. From a commercial point of view, Klarna looks like a roaring success. But for the young fashionistas who are lured into buying yet more clothes they can’t afford, this may come at a high price.