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19 Oct 2021

Klarna overhauls 'buy now, pay later' service: what you need to know

Checkout wording, late fees and affordability checks are changing
Person shopping for a baby carrier online

Klarna - a popular 'buy now, pay later' (BNPL) provider - has announced changes to its checkout language, late fees and affordability checks, amid growing criticism of the sector.

Last week, Which? research found online retailers were bombarding shoppers with BNPL promotions and often failing to include appropriate risk warnings about falling into debt as well as information on late fees, credit checks or how repayments work at the checkout.

Which? believes there must be no further delay to the regulation of the BNPL market to ensure shoppers are better protected when using pay later schemes.

Here, we unpack what Klarna's changes mean for you when shopping online.

Have you ever had an issue with a BNPL scheme? Tell us about it using our new BNPL complaints form.

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Updated checkout language and T&Cs

Our recent investigation into BNPL schemes uncovered 23 online retailers that didn't include Klarna's exact risk wording on their sites.

Others included sparse detail on key information when promoting BNPL schemes making it near impossible to understand the differences between each provider.

Since then Klarna has introduced new wording for retailers to use at the checkout, which it says will 'make it absolutely clear that BNPL options are credit products, with consequences for missed payments.' It's also updated its T&Cs with the help of consumer group Fairer Finance to ensure they're 'clear, simple and easy to understand.'

You'll now see a single Klarna button at the checkout alongside the other payment methods offered by the retailer. Once you select 'Klarna', you'll be able to choose the specific scheme you'd like.

Here's an example of the wording you should see at the checkout for Klarna's Pay in 3 scheme: 'You must be 18+ to use this credit offer. Klarna uses soft searches with credit reference agencies. These do not affect your credit rating. Missed payments can affect your ability to use Klarna. By continuing I accept thePay in 3 termsandKlarna Shopping Service terms, and confirm that I have read thePrivacy Noticeand theCookie Notice.'

Klarna promotions could intensify

Klarna's also introduced a new checkout best practice guide in its resources for retailers.

Klarna's new checkout best practices guide advises retailers to pepper banners for Klarna throughout the customer journey

The guidance recommends retailers pepper Klarna banners throughout their sites, including at the top of their websites and close to the price of the item on product listing pages.

It claims that shoppers who see promotions for Klarna at the beginning of the customer journey are more likely to continue shopping and complete purchases with higher average order values.

Which? research published last week found that this practice was already prevalent. Three in ten retailers that offered BNPL advertised it on their homepages, while more than four in five promoted the schemes on their product listing pages.

An expert told us that such advertising could be normalising the use of credit as well as distorting our understanding of how much an item will cost in total.

Stronger affordability checks

Klarna has also made changes to how it runs affordability checks, making use of its open banking platform which it says is connected to over 6,000 banks across 20 countries.

In addition to 'robust checks' Klarna performs on every purchase, shoppers will now be able to share their income and spending data from their bank accounts to confirm they can afford future repayments.

Klarna claims these changes will allow those with a limited conventional credit history, which is reliant on traditional forms of credit such as the use of credit cards, to access its pay later scheme.

Improved complaints handling and late fees slashed

Those who use Klarna's regulated Financing product (which some retailers offer for higher-value purchases and can charge interest) will no longer incur late fees for missed repayments.

This means that Klarna no longer charges late fees for any of its pay later schemes (though there are other consequences if you fail to pay back your instalments).

It's also introduced its own complaints adjudicator for customers who aren't happy with how their complaints are handled.

Currently, Klarna users can't complain to the independent Financial Ombudsman Service (FOS) - which normally deals with disputes about financial companies - as BNPL firms aren't yet regulated by the Financial Conduct Authority (FCA).

Which? believes there must be no further delay to the regulation of the BNPL market to ensure shoppers are better protected when using pay later schemes.

'Pay Now' option coming in 2022

Klarna is also launching a 'Pay Now' option, which will be rolled out to the majority of UK retailers in 2022, allowing customers to pay immediately and in full wherever Klarna is available.

It says this is to give shoppers 'more choice, clarity and control over how they pay.'

While this is a new Klarna product to the UK market, it doesn't offer anything wildly different from paying directly via debit card or PayPal, when shopping online.

But for those who enjoy shopping with Klarna, it presents a different option to pay upfront and without instalments.

How to shop safely with BNPL

  • Set a spending limit: with so many different schemes it's easy to lose track of all the mini-loans you're taking out. Make sure you set a spending limit so these don't spiral out of control.
  • Use reminders: taking out multiple loans with different providers can make it hard to know what to pay when. Use reminders to track when you need to make repayments.
  • Return unwanted items promptly: if you're ordering multiple sizes or just a range of clothes to try before deciding what to keep, do your returns promptly to ensure your balance is updated before payment is due.
  • Don't keep quiet: if you're going to struggle to meet the repayments, contact the company. They may be able to freeze late fees or offer an alternative arrangement.