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Klarna to start offering pay now option

Buy now, pay later firm Klarna is changing how it operates in the UK, and also introducing the option to immediately pay now for items in full.

Klarna to introduce pay now option - Online shopping

Klarna say that the new “pay now” option and other proposed changes will give customers more control and clarity.

The move comes ahead of expectations for the Treasury setting out rules for the buy now, pay later market. The sector has boomed in recent years. But charities warn that services like this could make it too easy for people to fall into debt.

Klarna wants to “drive up standards” in the industry with improvements to the way it works and communicates. The firm will perform more thorough checks on the amount that users can afford to borrow. It also pledges to use clearer language during the checkout process to make sure consumers understand they are taking on debt.

The choice to “pay now” is already available to customers in a number of the other 20 countries where Klarna is in operation.

Sebastian Siemiatkowski, chief executive of Klarna, says that retailers using the service see a 40% increase in average order values.

‘Slippery slope into debt’

Buy now, pay later services like Klarna offer shoppers the option to delay or spread the cost of a purchase without any fees or interest. Klarna charges retailers instead, so they pay a small percentage of the transaction cost in exchange for Klarna’s payment services.

The option to pay for items in instalments is particularly appealing to younger customers and those on lower incomes.

However, buy now, pay later schemes face much criticism for encouraging customers to buy and spend more than they can afford. Charities warn that it could prove a “slippery slope into debt”.

For example, it enables shoppers to order clothing items in several different sizes. They order more than they need because they know they have the opportunity to return and receive a refund for items that do not fit before being charged the full amount.

Shoppers receive constant bombardment with messages encouraging them to use buy now, pay later credit. But critics argue that the explanation of what it actually involves is not clear enough. Such firms fail to explain to consumers that they could refer them to debt collectors if they miss payments, and that their credit scores are affected.

A recent review by consumer group Which? found that retailers did not adhere to guidelines set by Klarna and other similar firms. This is despite the companies sharing with them specific guidance on how to present their service.

The popularity of buy now, pay later schemes

Klarna is the largest platform offering buy now, pay later. But there are many other similar services from firms, including PayPal, Clearpay and LayBuy.

In 2020, five million people in the UK used buy now, pay later services, totalling in sales of £2.7bn. However, a review by the Financial Conduct Authority (FCA) found that one in 10 people using such services already had debt arrears elsewhere. Three quarters of users were aged under 36 years old, mainly female, and most transactions related to purchases of fashion.

Citizens Advice say that shoppers do not view buy now, pay later services as “proper borrowing”. This means they do not fully understand what they sign up for. They warn that four in ten people who used this type of credit in the last year now struggle to repay.

However, Klarna’s boss still believes there is a place for this type of affordable credit offering. Mr Siemiatkowski says people should of course “pay with the money they have” “most of the time”. But he fells there are “certain times where credit makes sense”. In those particular cases, buy now, pay later products “offer a sustainable and no-cost healthy form of credit – and a much needed alternative to high-cost credit cards”.

Regulation

Klarna are working together with consumer group Fairer Finance to ensure terms and conditions of use are “clear, simple and easy to understand”. They want to ensure that the language in the checkout process makes it “absolutely clear” there are “consequences for missed payments”.

The firm are also improving its complaints procedure for dissatisfied customers.

The government announced in February that the FCA will regulate buy now, pay later products. This will allow customers to complain to the Financial Ombudsman if they are unhappy with the service. Before the financial watchdog sets out its rules, the Treasury is expected to have a consultation on the sector.

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