Financial comparison site money.co.uk slammed buy now, pay later firm Klarna founder for claims that it offers a fairer and more equitable platform for consumer spending than credit cards.
In Klarna’s interim report, chief executive and founder Sebastian Siemiatkowski said, “Credit cards drive economic inequalities. Those who can afford to pay off their balances each month reap rewards through loyalty schemes while those who can’t afford to simply get into more debt.
“The credit card model is simply unsustainable for consumers, in fact, it’s unsustainable credit. And consumers are waking up to this as they choose more sustainable forms of net credit that are transparent, fair and suit the way they live their lives today.
In response, money.co.uk senior editor James Andrews says: “There’s no doubt that problem debt can cause misery and worse to people trapped in a cycle of ever-bigger repayments.
“But what’s harder to see is how Klarna is the answer to that. People who can’t afford to repay aren’t exactly welcomed by the lender, and those that can repay on time see very little benefit for the loss of an awful lot of privileges.”
In fact, research from money.co.uk among 2000 consumers found that the average time UK shoppers say it will take them to clear their BNPL debts is now nine months, well in excess of the 30-90 day windows most schemes are based on. A separate study showed that Scottish consumers owe an average of £146.22 per person to BNPL schemes offered by Klarna, Clearpay and Laybuy.
The BNPL sector has indeed been criticised for encouraging people to spend more than they can and attract debt. Watchdogs have argued it’s driving many into an endless cycle of debt. A review by the Financial Conduct Authority (FCA) found earlier this year that users could easily spend more than £1,000 online with few checks on whether they could afford repayments. Klarna even had four influencer adverts banned by the Advertising Standards Authority (ASA) in December 2020 because they encouraged non-essential spending during the pandemic.
Andrews continued, “Klarna proudly claims to save people £144 of credit card interest every 60 seconds – we’re just not sure on what. That’s because purchases on credit cards don’t attract any interest at all for the first 56 days – almost identical to the 60 days interest-free Klarna offers on its popular Pay In Three option and far longer than its Pay in 30 Days product.”
Andrews claimed that borrowing via Klarna can push customers into a debt spiral, due to the lack of visibility with credit agencies. He said, “Someone struggling with Klarna debts looks like they have a clean bill of health to anyone else thinking about lending them money. The other side of this is that a history of paying on time with Klarna also isn’t reflected in your credit score – whereas on a traditional credit card this would see your rating improve.
“In return for that, anyone paying on time is giving up any possibility of rewards or a better credit rating – as well as all the extra protection offered by Section 75 of the Consumer Credit Act – all in return for a maximum of an extra four days of interest-free credit.”
New persistent debt rules oblige credit card companies to explain to customers what will happen if they only pay the minimum and ultimately stop the card and move users onto a more sustainable plan if it looks like they’re taking too long to clear their credit, Andrews said.
“There’s no such rule in place for Klarna – which simply passes you on to debt collectors if you don’t pay up for long enough,” Andrews added.
However, despite the criticism, the BNPL giant has been scaling up. Klarna, most recently valued at $46bn in an investment round led by Japan’s SoftBank. It increased the volume of purchases it processed on behalf of retailers by two-thirds in the second quarter to $20bn. It also said it is weighing a public listing, but that it is more likely to choose the US over the UK.
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