Klarna under fire for unsustainable credit card model claim

In buy now pay later venture Klarna’s interim report, covering January to June 2021 and published this week, Chief Executive and Founder, Sebastian Siemiatkowski, claims that 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,” he argues.

“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.”

“We’re seeing this not just through Klarna’s success, but through traditional banks and other payment platforms creating pay later products as they too recognise consumers are no longer willing to pay over the odds for flexibility in managing their money.”

It’s a point of view that doesn’t sit well with the folks at money.co.uk, an online comparison service that allows people to compare financial products.

“There’s no doubt that problem debt can cause misery and worse to people trapped in a cycle of ever bigger repayments,” says Senior Editor James Andrews.

“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.”

Almost a year on from the first ‘Shop Now, Stress Later Report’ the personal finance experts at https://t.co/9yFuXdG2Go have crunched the numbers to find out if the British public is still spending now, and worrying about the consequences later
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He adds: “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.”

“So the only way it’s saving people money is if its customers are habitual late payers - who see their accounts blocked until they clear the debt rather than interest charged.”

“Klarna’s own advertising also pushes people to spend more than they can - telling people to Shop Like a Queen is hardly a model for ‘sustainable’ borrowing - while boasting to merchants that people put 68% more in their baskets when they’re signed up.”

If we’re talking about sustainability and transparency, we have to mention credit reports, Andrews stresses.

Borrowing money on a credit card goes on your credit report, he observes. That means if things start getting on top of you, other lenders can instantly see how you’re faring before offering you new lines of credit to get into even more debt.

That includes missed payments, your total available credit and how much of that total you’re using.

“But they can’t see any information about Klarna debts because the shopping firm simply doesn’t share it with credit ratings agencies,” Andrews states.

“That means 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.”

“New persistent debt rules also mean credit card companies are also forced to talk to you, explain what will happen if you only pay the minimum and ultimately stop your card and move you onto a more sustainable plan if it looks like you’re taking too long to clear your credit.”

“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 concludes: “All this means the only advantage of Klarna over a traditional credit card is that you won’t ever be charged interest on its Pay In 30 and Pay in Three products. Although you can be passed on to debt collectors.”

“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.”

Taking a hit

In the aforementioned interim report, Klarna, most recently valued at $46 billion in an investment round led by Japan’s SoftBank, said that it increased the volume of purchases it processed on behalf of retailers by two-thirds in the second quarter to $20 billion.

But its operating losses rose from $10 million a year earlier to $111 million as credit losses more than doubled in that period.

Unlike many other FinTech startups, Klarna regularly posted profits during its formative years. but has been loss making since 2019 as it expanded rapidly, particularly in the US.