Buy now pay later firms: How does Klarna work and who uses it?
Klarna became Europe’s biggest private financial technology company towards the end of the last decade, with its "buy now pay later" model attracting around a million transactions a day.
The buy now pay later (BNPL) market has exploded in popularity as more people have turned to shopping online during coronavirus lockdowns.
But the Swedish giant, Klarna, has sparked a series of controversies and concerns as it sweeps across the world with a model that initially failed to capture imaginations.
The buying options are facilitated by companies such as Klarna, Clearpay and Laybuy.
Now, the buy now, pay later (BNPL) credit agreements will be regulated by the Financial Conduct Authority (FCA).
What is a Klarna payment and how does Klarna pay later work?
The Klarna payment scheme allows people to spread the costs of products over a longer period, rather than paying immediately in full.
In most cases the service is free to the consumer, as long as repayments are made on time.
What are the benefits of using such schemes?
For consumers, it may work out much cheaper to split the cost into interest-free payments, rather than turning to more expensive borrowing options.
Who uses BNPL schemes?
An estimated five million people have used a BNPL product since the start of the Covid-19 outbreak.
People who shop with online retailers including the likes of ASOS can use Klarna in order to pay for their items in three payments.
According to the Woolard Review, which has looked at such schemes as part of a wider study, around 25% of users are aged 18 to 24 and 50% are aged 25 to 36.
Three-quarters (75%) are female and 90% of transactions involve fashion and footwear.
How do the payment plans work with Buy Now Pay Later?
Retailers will pay a percentage to BNPL lenders, on the basis their services will help drive sales.
Shoppers may end up buying more if there are options to spread the costs.
People may also need to pay late fees, which can vary, if they cannot keep up with repayments.
For example, the Woolard Review found for orders under £24, Clearpay may charge a late fee of £6. For orders over £24, fees are capped at 25% of the original order or £36, whichever is less.
Klarna will try to take funds after seven days and again after a further seven days. If payments remain outstanding, debts could be passed to a debt collection agency.
Laybuy charges £6 after 24 hours and a further £6 after seven days.
What are the risks to consumers?
The review said products are often seen by consumers with a poor credit history or thin credit files as a viable alternative to more traditional forms of regulated lending.
Because such activity is not generally recorded by credit reference agencies, it can be easy to accumulate £1,000 of debt without this being visible to other lenders, the review found.
One in 10 customers of one particular bank were already in arrears when they used BNPL.
How has the new rule been received by campaigners?
Alice Tapper, who launched the regulate Buy Now Pay Later campaign on GoFundMe, told ITV News she is delighted that the scheme will now be regulated.
She said: "It's stories of consumers that have made it painfully clear that regulation is needed, so to bring that to life, it's about information and protection.
"So, because of a lack of regulation, shoppers as young as 18 who are advertised these products, by influencers for example, with no-risk wording."
When asked what sort of problems consumers have encountered through BNPL, Ms Tapper said: "I've seen teens and people in their early 20s get really caught up and rack up huge sums across multiple Buy Now Pay Later schemes.
"And then there are people on the other side of it, where they've been a victim of a Buy Now Pay Later fraud and then they've been unable to seek help of the financial ombudsman."