Klar“na” the easy payment option damaging your credit score
Klarna seems too good to be true. Is it that it actually could be? Swooping in like the perfect, fairytale solution to fund that pesky online shopping habit. It lets you spread payments over a couple of months, avoid the financial hit of a single outlay and still get the shoes/ dress/ cactus of your dreams. Right? Wrong. In reality as Alice Tapper (@go_fund_yourself) financial adviser, Instagrammer and campaigner has realized the potential dangers of buy now pay later (BNPL) services are substantial and well disguised, and could spell disaster for many young people.
Over lockdown 23% of 18-24 year old have turned to buy now pay later services to fund their online spending, but 2/5 of customers have no idea that it can affect their credit rating. A bad credit rating has long lasting repercussions; a low credit score can make it harder to borrow, whether it's a loan for a car, mortgage, or credit card account, which is bad news for future you. You can’t build a home out of shoes from ASOS. Alice Tapper is currently petitioning for the regulation of Klarna and BNPL services to help raise awareness of the repercussions of choosing this method of payment. She’s uncovered two major issues with BNPL :
1. There’s no regulation of Ad wording:
In Klarna and Clearypay adverts there is no appropriate risk wording, if any at all and influencers are not required to include any on social media posts. The kind of warning language used should be similar to that of gambling. Instead, we find the reverse is true. You know how funny it is when we look at smoking ads from the 1950s, with lip lined pouty women inhaling a cigarette and talking about it “being great for your health”, that’s how we’ll look at BNPL adverts in 10 years. Their ads are often manipulative, pressurising customers into over spending and fooling them into believing these products have “no interest, no fees. Ever”. On some items, this is simply untrue.
2. Late payments impact your credit score:
This is the real blind spot in BNPL products for consumers. Claims it will have “no impact on your credit score” can prove disastrous. If you fail to make a payment your credit score can be harmed and your debt will be sold to a collection agency. Yet, this information is nigh impossible to find at point of purchase, it’s all located in the small print and even then is dictated on an individual basis depending on the supplier. Just over 45% of young people who have used BNPL options have missed at least one payment. Translated, that means half the young people who use BNPL could be at risk of damaging their financial reputation long term. BNPL’s power exists in its mystery, many consumers don’t even know they should be looking out for these pitfalls. How can you keep an eye on a problem when you don’t even know it exists?
The psychology behind Klarna
BNPL services therefore induce a kind of surreal playground state of euphoria, you get to raid the cookie jar, without ever thinking of the consequences.
The clever psychology behind these financial services, however means we value our brand spanking new pot plant babies because we already own them, can water them and stroke them in the comfort of our own home whilst also feeling detached from the worry of future payments. This taps into two cognitive biases, as highlighted by Kimberley Wilson (@foodandpsych) Instagrammer and Psychologist. First, “the endowment effect, where you value something more once you already own it and delay discounting – the idea that we put less value on things (like payments) that are in the future.” BNPL services therefore induce a kind of surreal playground state of euphoria, whereby you get to raid the cookie jar, without ever thinking of the consequences.
This is something which Klarna in fact boasts on their website for prospective business partners. They create perfect customers who “buy more and do it more often”. Speaking to Lucy Smith*, a freelancer working in Film & TV, she’s currently on Universal Credit but recently spent far beyond her means using Klarna on an ASOS order. She openly attests to Klarna influencing this trigger happy behaviour and is now suffering the consequences. Faced with the prospect of payments over the next couple of months, she’s come to the realisation her purchases are unaffordable and is now having to return her bounty. She is lucky to have been so sensible early on and without getting into hot water. The danger is when there are repeated outlays like this one. Many consumers in a fugue state, desperate for the variety which “newness” brings in this dystopian Covid world, are reaching for temporary highs to fill the boredom and the hole which would normally be brought by a thriving social life and the variety of a workday. This is something which companies like Klarna and Clearpay have banked on.
It strikes me that BNPL is a bit like a great night out. Some nights, the music is just right, you’re with the right people, you feel great and you hit that perfect level of tipsy where everything is smoothed out and funny. Waking up in the morning, you feel tired but content with a phone full of memories. Or, some nights out you wake up with a crusty hangover, regretting that 3AM donner kebab and cursing that final tequila shot.
In May Klarna released new data that tracked how UK consumer purchasing habits had evolved while under lockdown. The statistics are pretty unbelievable. Across the board in children’s products, health and beauty, home and garden, jewellery and accessories there was a huge spike in spending once lockdown began. Gen Z increased their spending with Klarna in Home & Garden purchases by 262%…! Millennials spending increased by 68% in the two weeks leading up to lockdown, and then week on week Home & Garden saw an increase of 231%. Gen X also had a 156% in expenditure in Home & Garden and Baby Boomers by 136%. Data on missed payments is remarkably and (unsurprisingly) harder to come by on their website.
So, what’s the big deal? There was an increase in spending during lockdown, that’s hardly surprising. The point is that every generation without exception is spending more readily and more than they would have previously. This is all done in a blissful state of ignorance, completely unaware of the implications that it could lead to being harangued by debt collectors or damage their potential to purchase a house or a car. No big deal, it ain’t.
BNPL isn’t all bad and can be incredibly useful or even life changing for many who are on strict budgets from month to month. It is also however big money as a business and plays on those who are more likely to be financially insecure, vulnerable and unaware of the potential risks and dangers of these services. I’m not saying services like this shouldn’t exist, but just that they need to be regulated. It strikes me that BNPL is a bit like a great night out. Some nights, the music is just right, you’re with the right people, you feel great and you hit that perfect level in the night, where you’re a little bit tipsy and everything feels wonderful. Waking up in the morning, you feel tired but content with a phone full of memories. Or, some nights out you wake up with a crusty hangover, regretting that 3AM donner kebab and cursing that final tequila shot. Let’s hope Klarna, Clearpay and other companies like it take it upon themselves to read the current temperature of the world climate and pull up, become more honest about their work practices, increase advertising transparency and make that post purchase high last more than the night.