Buy-now pay-later giant Klarna will begin penalising customers for late payments in the UK next month in a bid to curb loan defaults, as shoppers pour onto the platform amid a cost of living squeeze.
The Swedish bank and payments firm, which has been on a major cost cutting and profitability push in the past 12 months, will begin charging a £5 fee to customers that miss payments from the 16th March. Fees will be capped at 25 per cent of the order value with no more than two fees per order, Klarna said in a press release.
Late fees mark a major shift for the lender that may unsettle some debt campaigners, who have been sounding the alarm as shoppers turn to the unregulated deferred payment tools in droves amid a squeeze on their spending power. Nearly £1 in every £8 spent online last month was sourced from BNPL providers like Klarna, Clearpay and Laybuy, according to research by Adobe Analytics.
Klarna says that thanks to its „robust credit checks, over 99% of people pay back their loans.”
However, Klarna has experimented with a number of different approaches to late fees. The company charges a fee in most countries, except the UK where Klarna has not charged a late fee at all.
“Not charging fees feels customer-friendly, but we’re worried it drives the wrong behaviour and our data now shows that a total absence of late fees actually leads to less favorable outcomes for customers: with less reason to pay on time, customers are more likely to fall behind. It’s like a city with no parking tickets; it sounds great, but in practice turns out to not be so great,” said Alex Marsh, Head of Klarna UK.
In the Netherlands and Belgium late fees have improved Klarna’s on-time payments by 20%. And, in a YouGov survey, 75% of British customers said they were more likely to pay on time if there was a late fee.
“We’ve concluded that having no fees is not in the best interest of our customers, but we don’t want to rely on fees or charge extortionate amounts like traditional banks who monetise the misery of customers who fall behind. After all, if everyone paid their credit card bill on time, the card companies would go out of business,” Alex continued.
Klarna has developed two strategies to ensure that late fees only ever guide positive financial habits for customers and is fully prepared to make changes to the programme if these measures don’t improve customers’ financial habits:
Firstly, while Klarna will introduce a small fee for late payments, it will at the same time help prevent its customers from missing a payment entirely, including offering automatic payments, sending four friendly reminders, and applying a seven day grace period before charging a fee. „Klarna will monitor and cap the fees, applying a threshold on the total amount the company can collect to make sure it works in favour of its customers.” – the company says.
Secondly, Klarna will use the fees collected to support customers who have fallen behind. Under the Customer Recovery Programme, to be launched later this year, Klarna will proactively contact customers with long-overdue payments and offer to waive 50% of their balance. Eligible customers will be required to pay the remaining 50% before making additional purchases and will avoid having their debt sent to debt collection. „The programme will help customers who are behind on payments get back on track with their money management.” – the company believes.
Klarna self-regulates in this way across its global business, and even reduced fees by $100m a year in 2021 in Sweden. Today, Klarna is calling on the FCA to consider limiting how much banks can earn from late fees, within the context of the Consumer Duty, to ensure they only encourage people to pay on time, and never become a way for banks to make more money. UK banks and credit card providers earn £6bn each year from interest charged to customers who have fallen behind on their payments.
James Daley, Managing Director at Fairer Finance, said, “We are pleased that Klarna has introduced late fees, as we have previously recommended to them. Used responsibly, late fees provide an important deterrent as well as a reminder that Buy Now Pay Later is a form of credit and needs to be taken seriously as a loan. It’s of course important that late fees are fair and reasonable, and don’t become an income stream for credit providers, and it’s encouraging to see that Klarna intends to provide additional support for those who fall behind.”
Klarna’s initiatives to help prevent customers from missing payments are:
‘Autopay’ will launch on Pay in 30 days so customers can set payments to be automatically taken from their account.
From 16 Mar 2023 fees of £5 will be charged for late payments after a seven-day grace period and a minimum of 4 friendly reminders have been sent. Each fee is capped at 25% of the order value and there will be no more than two fees per order.
Fees collected will be used to fund the Klarna Customer Recovery Programme to support customers who are in arrears. Under the programme, Klarna will offer to waive 50% of the balance owed by customers who have fallen behind on their payments instead of engaging a debt collection agency. The customer will be blocked from making additional purchases until they have made a payment for 50% of their overdue debt. At which point Klarna will consider the debt closed and no further action will be taken.
Klarna is also using late fees to incentivise targeted financial education. For the first six weeks after the fees are introduced, customers who agree to take a short financial awareness test (the ‘Never Forget’ test) in the Klarna app will have their late fee waived.
Klarna has taken on board research from Which? and Citizen’s Advice to ensure that late fees are clearly sign-posted throughout the customer journey. The company restricts the use of their BNPL products until missed payments are made and offers clear repayment dates through friendly reminders via email, in-app, and SMS.
„Klarna’s robust underwriting decisions ensure that customers only borrow what they can afford to repay. This is in stark contrast to traditional banks which set an ever increasing credit limit and encourage minimum payments, to trap customers into revolving debt with sky-high interest rates.” – the company explains.
Banking 4.0 – „how was the experience for you”
„So many people are coming here to Bucharest, people that I see and interact on linkedin and now I get the change to meet them in person. It was like being to the Football World Cup but this was the World Cup on linkedin in payments and open banking.”
Many more interesting quotes in the video below: