Buy now, pay later firm Klarna could be prompting a ‘debt crisis’ for online shoppers
Since the publication of this article, Klarna has responded to issues raised. Read the company's full statement at the bottom of the story.
As lockdown has kept the majority of us indoors, many have turned to the internet for our shopping needs.
Anyone who has ever bought clothes online will surely be familiar with the ‘buy now, pay later’ (BNPL) firm, Klarna, which encourages shoppers to spread out the cost of a purchase over a number of smaller, separate payments.
However, many users aren’t aware of the possible dark side of Klarna, from debt charities warning of a “debt crisis” to users' credit scores being badly affected.
‘Threatening letters were sent to my house’
Former Klarna customer, Lily, started using the service because she had an ASOS Premier subscription. She found that it was easier to pay for items using Klarna.
“It almost felt like ‘free money’ because I could buy something without the hassle of putting my card details in,” she explained.
Lily didn’t have any issues with Klarna, up until summer 2020, when it all went wrong.
“I tried paying for an ASOS parcel and it didn’t go through on the app, not once but three times,” she said.
“[Klarna] saw that as a late payment, so they sent threatening letters to my house saying that they were going to pass me on to a debt collection agency.”
Lily attempted to get in touch with the Klarna customer service team, but they “weren’t particularly helpful”.
“They said that I could pay via bank transfer, which I did, under their very specific instructions using a reference number, and then they claimed that they couldn’t find it,” Lily said.
According to Lily, this went on “for a number of weeks”, despite the fact that she had sent confirmation that the funds had left her bank account.
“This outstanding payment was still on my Klarna account,” Lily said.
This issue for Lily was only resolved when her situation was reported by The New Statesman.
“They were then extremely apologetic and offered me £25 compensation. This was supposed to have cleared by 23 December , but is still outstanding,” she explained.
“They’re now asking me to give them written confirmation from my bank account that the funds haven't gone into my account, because I presume they assume I’m lying.”
‘Very stressful and time consuming’
A number of other Klarna users spoke to consumer watchdog Which? in 2020, detailing their issues with getting money back from the BNPL company.
Charlotte from Manchester had been waiting to be reimbursed for a pair of trainers she used Klarna to buy from JD Sports in October. She had used Klarna’s ‘Pay in 3’ option which allows shoppers to spread the cost of a purchase over three payments.
She said: “I’ve used Klarna for about two years now. I’ve never really had any problems but this refund issue has been quite concerning.
“I took back the trainers because they were too big. I got an email from JD saying my refund was being processed, so they acknowledged that I’d sent them back, but the money’s not come back into my account.
“I went to Klarna and they told me to make sure I keep a record of everything I’ve done, and they will open a dispute.
“I felt mortified because I don’t want to get penalised for something I could afford in the first place. It’s only £13 I’m waiting to be refunded but it’s more the fact that I don’t want my credit score affected, I don’t want those issues.”
Another shopper also had a similar experience using Klarna to pay for goods at JD Sports.
“I returned a lot of items in store in June, and it’s been a mess ever since,” they said.
“The employee refunded me part of the money by mistake and four months later I’ve been back and forth with Klarna and JD Sports over money owed.
“This has been very stressful and time consuming.”
‘External debt collection agency’
Klarna itself is free to use, but “interest and fees may apply to the use of specific services offered by Klarna” according to its terms.
The company’s website states: “If you fail to pay on time, you will be in default, and may be unable to use Klarna’s services in the future.
“If you do not pay for your purchase, Klarna may engage with an external debt collection agency to collect on our behalf.”
Credit score impact
Research has shown that two fifths of people were unaware that buy now, pay later schemes could hurt their credit score.
“Using a credit card, store card or scheme like Laybuy, Clearpay or Klarna can damage your credit score if you miss a payment and fail to repay what you have borrowed,” Which? explains.
Missed payments, or failure to pay back what you owe, can be marked on your credit report and can stay there for six years. This will be visible to lenders, and could hurt your chances of getting approved for future credit, such as a loan or mortgage.
You may also be reported to a credit reference agency (CRA) by the company you made a BNPL agreement with if you fail to repay what you owe, or if you miss payments.
A Klarna spokesperson said that for Klarna's 'Pay Later' products, the company does not report missed payments to the CRA.
"To date, a customer's credit score has not been impacted using Klarna's 'Pay Later' products, even if they failed to pay on time," the spokesperson said.
Sue Anderson, from debt charity StepChange, claims that BNPL debts are an increasing issue.
“These services can be a tempting source of quick and easy-to-obtain credit, but it can be all too easy to overestimate what you can afford. The reason retailers offer BNPL is because people buy more than they otherwise would,” she said.
“These services must give clear, plain English information for customers - especially those that could have the potential to see them build up debt,” she said.
What are your consumer rights when using a BNPL?
Jenny Houseago, Consumer Expert at Citizens Advice, said that generally, your consumer rights are largely the same, regardless of whether you use a BNPL - the only difference is where you would get your refund from.
“How you will get the refund depends on the terms and conditions of the BNPL firm that you bought the items through,” Houseago explains.
“Generally, the buy now, pay later firm will need the retailer to refund the money and then it will credit the card linked to your BNPL account.”
She advises getting in touch with the BNPL firm you’re using to check if you need to keep making instalment payments while waiting for the refund, to ensure you aren’t charged a penalty for a missed payment.
Houseago adds: “Some BNPL firms’ terms and conditions say they are not liable for retailers going into administration. It’s worth checking if you would therefore need to continue paying them for items that you’ve ordered from a retailer if it goes into administration - even if you don’t receive the items.”
It is worth noting that if you have a credit card linked to your BNPL account, you’re unlikely to get the usual Section 75 credit card protection if the retailer goes into administration.
“Under Section 75, the credit card firm is jointly liable for the goods and so can be a way of getting your money back. You can’t use Section 75 if you paid through a third party, such as a BNPL firm,” Houseago says.
The next steps if you’re struggling to get a refund
It can sometimes be difficult to obtain a refund that you’re eligible for.
Houseago explains that if it is the retailer that if refusing to refund your money, the first step you should take is making a formal complaint.
“If you’re unhappy with its response, you can check if it belongs to a trade association that you can escalate your complaint to,” she says.
You may also be able to get your money back if you paid via card or PayPal.
Houseago says: “If you’re struggling to get the BNPL firm to process the refund that a retailer has given, you should complain to it.
“You can also check if the firm is part of an ‘Alternative Dispute Resolution’ scheme that you can escalate your complaint to. If it is, it should say so in it’s response to your complaint.
“If you make payments to the BNPL firm using a debit card, you could see if you can use the Chargeback scheme. Chargeback is when your card provider asks the seller’s bank to refund money to your account.
“Ultimately, you could try to recoup your money via the Small Claims Court, but you should seek free advice from organisations such as Citizens Advice first.”
'We make it as simple as possible for customers to communicate with us'
A Klarna spokesperson said: “In the UK, we receive fewer than four complaints for every 10,000 purchases we process, which is phenomenally low in the banking and payments sector.
“We make it as simple as possible for customers to communicate with us and offer them a range of channels for them to do so, including 24/7 chat in app, email or phone. If a customer is having an issue, we urge them to get in touch via our customer service team who will help resolve the issue.
“On the rare occasion that things go wrong, we have an in house complaints procedure to make sure complaints are handled in a transparent, effective and timely manner.”
In regards to the “debt crisis” concerns, the spokesperson said: “We want to empower consumers to take control of their finances and spend sustainably.
“We help consumers move away from credit cards and toward debit cards by providing occasional access to credit when needed, interest and fee-free, and with a regular payment schedule.
“The vast majority of our consumers use our Pay Later services one or twice a year, pay us back on time and use a debit card to do so.”
Klarna also launched a programme called Mindful Money, which offers tips and guidance on “financial wellness”.
The spokesperson added that for 2021, Klarna has “committed 50 per cent of our marketing spend to financial education and wellness”.
Klarna also states that it supports “regulation of the sector”.
“It is vital that regulation is updated for the digital age, to ensure that consumers are protected regardless of which provider they choose,” the spokesperson said.
‘Irresponsible’ Klarna ads banned
Four “irresponsible” Instagram posts promoting the BNPL firm have been banned by the Advertising Standards Authority (ASA).
The adverts were posted by online influencers between April and May 2020, who had been paid by Klarna to promote the service. They promoted buying clothes as a way of “lifting” or “boosting” your mood during lockdown, with references to Klarna.
After an investigation was carried out by the ASA, it ruled that these adverts must not appear again in their current form.
Additionally, future ads “must not irresponsibly encourage the use of Klarna’s deferred payment service, particularly by linking it with lifting or boosting mood”.
A Klarna spokesperson denied that the firm was contributing to a debt crisis. A spokesperson issued the following response to the content of this article:
"Our Pay Later products offer consumers access to occasional credit which is both fee and interest free and has a regular and set payment schedule.
"We are helping consumers avoid more expensive and harder to manage forms of debt, like credit cards. Consumers who do not have, or do not want to use credit cards, use our service when they need extra flexibility or security for an online purchase.
"We perform an eligibility check every time a consumer makes a purchase using Klarna and we have limits in place - including restricting access to Klarna - to ensure that customers cannot accumulate large amounts of debt using our products.
"We recognise that people’s financial circumstances may change and therefore do not lend to everyone or offer an open line of credit on our Pay later products. We also have a dedicated team who work with customers in financial difficulty to find a solution that is appropriate for them.
"To date, a customer’s credit score has not been impacted by using Klarna’s ‘Pay Later’ products even if they have failed to pay on time.
"Klarna’s Pay Later products do not apply interest or fees, ever. We are a fully licensed bank and also offer regulated products - which are not the subject of debate or classed as Pay Later products - such as financing. Financing is based on a hard credit check. Both the credit check and terms are made clear to the consumer at the point of application.
"On extremely rare occasions and as a last resort, if after several months of trying to contact a consumer who has fallen behind on their payments, we are still unable to contact them, we will refer them to a collection agency."