Klarna insists buy-now-pay-later better than credit cards

Klarna has 10 million customers in the UK and was recently valued at £7.5bn

The boss of Klarna has claimed its buy-now-pay-later model is cheaper for consumers than credit cards and stops them getting into deep debt.

Sebastian Siemiatkowski said consumers are better off because it doesn't charge interest or late payment fees.

He also said credit cards offer big borrowing limits whereas Klarna gives credit on a purchase-by-purchase basis.

However, campaigners say these products make it easy for people to "unwittingly" fall into difficulties.

Citizens Advice, a network of legal, money and consumer groups, warned earlier this year that buy-now-pay-later products can be a "slippery slope into debt" and called for greater regulation.

The use of buy-now-pay-later finance has exploded during the Covid pandemic. A review into the market by the Financial Conduct Authority's (FCA) former interim boss, Christopher Woolard, found that usage had nearly quadrupled to £2.7bn in 2020.

Companies such as Klarna, Clearpay and Laybuy allow consumers to buy a product and pay in 30 days or spread the cost, usually over a three-month period.

'Better solution'

However, unlike credit card companies, they perform only a "soft" affordability check which means it does not affect a person's credit score and is not visible to other lenders.

If a shopper fails to make a payment using buy-now-pay-later, the company can reject them as a customer in the future.

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But other buy-now-pay-later lenders cannot see if a person has been rejected by a similar company, increasing the potential for consumers to rack up debts.

Mr Siemiatkowski said that if users treat credit with the company responsibly, "then slowly we increase the availability of it".

He told the BBC: "In Britain, we have more credit cards than there are people.

"[Klarna's] solution is a better solution for people because it is free of interest, it doesn't have additional late fees, it is not trying to make money that way and so it is better for the consumer using this."

He added: "It is also important to understand that our underwriting looks very different. [With] a credit card you get a limit for £1,000 - you can go out a spend it and unfortunately get in the full depth of it if you use all of it."

The massive popularity of Buy Now Pay Later options for online purchases has propelled Klarna and its main competitors Clearpay and Laybuy into the spotlight.

Younger people are often more cautious about using traditional credit cards, but see these online payment-spreading options as a safer and more accessible choice.

It's a hugely tempting offer to be faced with at check-out. Do you pay for a product right now, or spread payments, with no interest, no fees and, supposedly, no impact on your credit score?

But the headline promises aren't the whole story. Plenty of people do fall into debt when they don't keep up with payments, debts can be passed onto third party collection companies, and the situation can spiral.

That's why debt advice charities have been have been calling for better regulation of the industry. Although regulators and the government in the UK agree that something needs to be done, nothing has happened yet.

'Consumer harm'

The Woolard Review has recommended that buy-now-pay-later products should be regulated "as a matter of urgency".

Mr Woolard said: "The emergence and expansion of unregulated buy-now-pay-later products gives consumers a significant alternative to more expensive credit, but this also comes with significant potential for consumer harm.

"For example, more than one in ten customers of a major bank using buy-now-pay-later were already in arrears. Regulation would protect people who use buy-now-pay-later products and make the market sustainable."

On Monday, Klarna announced it was extending its reach beyond the companies it partners with. Shoppers will now be able to buy-now-pay-later on any online order through Klarna regardless of whether or not the company has ties to Klarna.

Mr Siemiatkowski said that Klarna welcomes regulation: "We want to have regulation to avoid penalising people unnecessarily in that we want to have a full understanding of their financial position.

But he said: "We've got to be very very careful not to put regulation in place that actually will benefit the incumbents that are making billions in interest from UK consumers."

The FCA is currently considering its response to the recommendations set out in the review. It will publish its response in its business plan for 2021-22 which will be published in July.