Would you like to pay now by debit/credit card, PayPal or pay later with Klarna? That’s the question you now get when using the ASOS checkout. With 4 days until payday, having the option to pay later sounded enticing, but having never heard of Klarna, it sounded too good to be true.
So I decided to do some research.
What is Klarna?
Klarna is a new form of digital payment set up by Swedish entrepreneur Sebastian Siemiatkowski back in 2005. It didn’t launch in the UK until 2017, but is currently valued at around £2bn.
Klarna allows online shoppers to buy now, pay later. If you’re accepted for Klarna’s pay later service you have either 14 or 30 days (depending on the retailer) to pay for your online order. It means you can order as much as you like, get everything delivered, decide what you’re going to return and only pay for what you keep.
There are no interest, fees or late charges and getting approval depends on a soft credit check (which doesn’t show on your credit report when other lenders run checks) credit history, and age.
Having recently partnered with H&M in a deal worth $20m, you can also use Klarna when shopping with other big brand names such as Schuh, JD Sports and Topshop in the UK. However, globally, Klarna is being used by 15,000 merchants and 20 million individual consumers.
Targeting the millennial market
According to research conducted by Statista, shopping online for clothes or sporting goods was most popular among 16 to 24 year olds in Great Britain as of 2018. And other research has shown that younger adults generally shop more frequently online than the older demographic.
For millennials lacking in disposable income, one of the biggest annoyances and obstacles to online shopping is having to wait for returns to be refunded. Klarna negates this issue making it a really attractive method of payment for those in that age demographic.
You only have to look at the brands they’ve partnered with to see that they’re looking to capitalise on this market. JD Sports for example, sells Klarna to its customers by saying it’s for those who “wanna’ cop some new gear but can’t wait until payday” and those who “not got the money right now but need new ‘fits.” Yeah me neither…
How does Klarna work from a business perspective
Because Klarna does not make money from interest and surcharges, it relies on merchant transaction fees from retailers. The Swedish start-up says it can increase ecommerce orders by around 30% and the average order value by 34% (although it isn’t clear whether this takes into account returns or not).
Despite this being quite a bold claim, customers seem to back it up.
Speaking to the Guardian, James Watkins, 28, explained the effect Klarna has had on his spending: “Klarna has definitely increased my spending through Asos – I’d say it’s risen by 300% since Klarna was launched on the site. I now have a date in my diary each month to pay off my Asos balance on Klarna, which suggests how often I use this option.”
Similarly, Natalie Richardson, 26, outlined how Klarna has allowed her to increase her spending: “Before Klarna, I used to be in a constant cycle of waiting for money to be refunded after returns, which reined in my spending to a degree.”
With this apparent increase in spending, some groups have urged caution with using Klarna, claiming it could cause people to run into debt and encourages impulse buying. Debt advice firm PayPlan have raised concerns saying it “does not encourage budgeting.”
With research showing that a quarter of young people in England and Wales are in constant debt, with nearly half having to borrow money, work extra hours or skip meals just to last the month, it’s not surprising that some are wary of this new digital payment method.
But there are no interest, fees or late charges, so what’s the problem? Well, if customers do find themselves unable to pay their bill when the time comes, non-payment will affect their credit score and accounts can be passed to debt collection agencies if unpaid after several months as a last resort.
However, a Klarna spokesperson has said: “We have safeguards in place to ensure that our products are only offered to those who are able to afford it and who will be able to make repayments in a sustainable way, without impacting their financial well-being. None of our customers can make unlimited transactions. We have thresholds in place to ensure that a customer makes a payment on their current purchases before they are able to make any further purchases, to prevent overspending and encourage responsible purchasing.”
Will Klarna be the new PayPal?
With a promise of increased conversions and average order value, it’s easy to see why retailers would want to partner up with Klarna. And for those savvy shoppers who simply use it as a nice way to get around the pre-payday slump, it could be useful. But there is that worry that the payment method could encourage impulse buying and a culture of ‘buy now, worry about it later.’