The buy-now-pay-later business model of Klarna is not only cheaper for consumers compared to the credit cards but also is useful for preventing consumers from falling into a debt trap, said the chief of the company.
Since his company does not charge interest or late payment fees, therefore consumers are better off dealing with the company, said Klarna chief Sebastian Siemiatkowski in a television interview.
Klarna gives credit on a purchase-by-purchase basis while credit cards offer big borrowing limits, he also said.
However there is criticism by campaigners of this business model who argued that these products could result in consumers to “unwittingly” falling into difficulties.
Calling for greater regulation of the business model, a warning was issued earlier this year by Citizens Advice, a network of legal, money and consumer groups, that the buy-now-pay-later products can be a “slippery slope into debt”.
The Covid-19 pandemic has boosted the use of buy-now-pay-later finance. Usage of the business model had nearly quadrupled to £2.7bn in 2020, found a review into the market by the Financial Conduct Authority’s (FCA) former interim boss, Christopher Woolard.
Under this system, consumers are allowed by companies such as Klarna, Clearpay and Laybuy to purchase a product and pay in 30 days or eve3n spread the cost typically over a period of three months. But only a “soft” affordability check is conducted by the companies, unlike credit card companies, which means that this system purchasing does not impact the credit score of a consumer and the dealings cannot be viewed by other lenders.
Individuals can be rejected as consumers by a company in the future in case the individual is unable to make a payment using buy-now-pay-later.
Additionally, the lenders of the buy-now-pay-later system also are unable to see whether an individual has been able to make a payment and has been rejected by a similar company which enhances the possibility of consumers falling into spiral of debts.
If the consumers treat the credit with the company responsibly, “then slowly we increase the availability of it”, Siemiatkowski said.
“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,” Siemiatkowski said.
“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,” he added.
Klarna and its main competitors Clearpay and Laybuyhave ben propelled into the spotlight because of the huge popularity of the Buy Now Pay Later options for online purchases as well.
Younger people typically view these online payment-spreading options as being safer and a more accessible compared to more accessible using traditional credit cards as they are often cautious about using them.
(Adapted from BBC.com)