The Student
Klarna and Clearpay: A false sense of financial security?
by Orla O'Dwyer, 3/10/20

In 2020, online shopping is almost as synonymous with student life as beans on toast. Busy schedules make the idea of trekking all the way to the high street an unrealistic afternoon activity, especially when there are literally thousands of options more readily available online. Why give up hours of your day to find the perfect new pair of flares when you can browse all your favourite shops while you’re watching TV or, let’s face it, lectures?

Free returns, offered by sites such as ASOS, mean we can buy and return what we don’t like without a second thought; the only hang-up is the length of time the refund takes to hit your account, something that is particularly off-putting for cash-strapped students.

Enter Klarna, the Swedish bank offering alternate payment arrangements for customers shopping at thousands of online stores. The option to ‘buy now, pay later’ means students don’t need to wait until their next loan or payday to buy what they want: they can simply agree to pay for their shopping at a later date. And if they decide to return the clothes? No money ever leaves their account. Klarna makes it possible to try on hundreds of pounds worth of clothing from the comfort of your bedroom without worrying how you’ll pay it off – nothing short of a dream for most students.

It almost sounds too good to be true, and it turns out that it might be.

Shopping with Klarna requires at the very least a ‘soft’ credit check, and if you are using the ‘slice it’ option, a hard credit check. With this option, you split your shopping into three payments and manage when you will pay them. A hard credit check will show future potential lenders that you have applied for credit in the past, and so suggests that you might be at higher risk of not paying back. This seems like an excessive risk for a student just trying to buy a new pair of jeans before payday.

What appears to be the most dangerous aspect of the service is that it very clearly targets young people – who are most likely to benefit from borrowing in this way – and their very limited knowledge about loans, interest and credit checks. Considering the nature of the employment of young people in 2020, they are also the least likely to be able to predict with certainty their future income. A pastel pink logo and pun-filled bus ads are undoubtedly aiming to catch the eyes of millennial (and even younger) shoppers, and it certainly works. Which? found that in the past year one fifth of shoppers had used a buy now pay later scheme, with that proportion rising to one third amongst 25-34 year olds.

But Klarna does not see itself as dangerous. Noting on their website that the company is named Klarna, the Swedish word for ‘clear’, the company views their own business model to be transparent and certainly not malicious. Unlike the infamous ‘loan sharks’ such as Wonga, Klarna makes the majority of its profit from ‘transaction fees’ paid by the retailers they work with based on the increase of online sales the ‘buy now pay later’ option generates. The company itself believes it can increase average online orders by thirty per cent. 

Klarna’s UK managing director said Klarna was ‘different’ from using credit cards as they ‘work with the customer’, and also because customers who have struggled to repay in the past are unable to use the service again.

But even given this, some would argue that the dramatic increase in young people’s spending caused by Klarna and similar companies is irresponsible in itself. Buying now and paying later encourages shoppers to spend less time considering whether they really need something and act simply on impulse. If we’re trying on a dress in our bedroom as opposed to a Topshop changing room, we are undoubtedly more likely to keep it, through laziness if nothing else.

Klarna gives young people flexibility around spending that they usually don’t have, and this certainly sounds like a good thing. But the friendly advertising and the lack of emphasis on the potential risk if payments are missed can be truly dangerous and using this option should be no reason to ‘sit back and relax’ like their website recommends.

Image credit: Slush – additional via Flickr