“Buy now, pay later” – looks like the credit card is losing its credit!

It is every shoppers dream to get their product or service without paying for it. Klarna has made this dream a reality – or just about anyway. Klarna is an online platform which has replaced the checkout service on a company’s website (Business Model Zoo, 2020). The CEO of the company described it as “separating the buying from the selling” (Sebastian Siemiatkowski; cited in Loizos, 2015). It essentially allows customers to buy products and pay in interest-free instalments later (they can decide over how long a period of time). It does not carry out credit score checks, but rather looks at data such as when the product was bought (if something was bought at 3am this may ring alarm bells) (Loizos, 2015). Customers do not have to provide their payment details to the merchant and it reduces fraud as the products can only be sent to the registered address (Skinner, 2015). This all sounds great for the customer, but what is in it for the company apart from a monthly fee? By using Klarna customers are going through less hoops – they simply type in their email address and postcode. This speeds up the purchasing process, making it much more likely that the purchase will go through. This means more sales for the company using Klarna (Skinner, 2015). On average there are 1 million purchases a day using Klarna and over 130,000 merchants using the company (Business Model Zoo, 2020). 

I came across Klarna on one of my favourite places to spend my free time – ASOS. I have spent far too many hours scrolling through the pages and pages of clothing, adding things to my basket, and never actually ending up purchasing them. A student’s budget did not cover the costs of my ridiculous basket costs at the end of a harmless browse. When ASOS started using Klarna a few years ago, things changed. Although I was not able to buy everything in my shopping trolley, I was able to make purchases over a longer period of time in smaller invoices every month – every student’s dream! I was also able to buy things in various sizes to see which would be best without the money coming out of my account straight away.

Klarna have also managed to reduce the risk of fraud as customers do not have to enter their details at the checkout. Instead they pay Klarna via bank transfer or online payment using the invoice they receive (Klarna, 2018).  Any issues the customer has with the product they can go through Klarna to sort it. This digital disruption of the checkout system has led to changes in patterns of consumption – the customer often consumes more and is in greater control of paying for their purchases. Consumerism is encouraged with this digital platform and this is part of the reason why it has been so successful. 

Klarna’s success has created a copying effect – other businesses have seen what a great model this is and tried to create a similar one. Stripe is one of Klarna’s biggest competitors and earns double the revenue of Klarna despite them coming into the market after Klarna (Loizos, 2015).  Klarna’s founder has said they think that the company is amazing and they support them, however, their business model is fundamentally different (Loizos, 2015). Other businesses may take advantage of Klarna’s idea and saturate the market, however, Klarna have a good reputation and are used by some of the biggest companies in the UK alone (Loizos, 2015). 

There is an ethical issue that comes with Klarna – is it setting up millennials (like myself) to become caught up in debt? (Lunn, 2018). Arguably, it is creating a new normal around borrowing money. Most young people do not have good enough credit scores to pay in intervals such as that of Klarna – essentially free debt. It has accelerated the “I want it now” mentality in young people (Lunn, 2018). Which inevitably leads to greater debt for younger people. This is not good for Klarna either as they will not receive all the money that they are owed. Klarna insists, however, that their checks on people before they are able to purchase are reliable and will not affect their financial well-being (Lunn, 2018). And it seems to have worked up until this point. Klarna has been and continues to be very successful through its use of a digital platform that distances the customer from the merchant. 

Reference List

Business Model Zoo (2020) Klarna Product Model. Retrieved March 5, 2020 from http://www.businessmodelzoo.com/exemplars/Klarna

Klarna (2018) The rise of the Direct-to-consumer model. Retrieved March 5, 2020 from https://www.klarna.com/knowledge/articles/the-direct-to-consumer-model-what-retailers-can-learn/

Klarna (2020) Homepage. Retrieved March 5, 2020 from https://www.klarna.com/uk/

Loizos, C. (2015) Klarna: a unicorn, is coming to the US and going after US credit card companies. Retrieved March 5, 2020 from https://techcrunch.com/2015/10/28/klarna-a-unicorn-is-coming-to-the-u-s-and-going-after-u-s-credit-card-companies/

Lunn, E. (2018) Klarna: ‘buy now, pay later’ system that is seducing millennials. Retrieved March 5, 2020 from https://www.theguardian.com/money/2018/nov/17/klarna-buy-now-pay-later-system-that-is-seducing-millennials

Skinner, C. (2015) Klarna Chameleon: you know something works when its copied. Retrieved March 5, 2020 from https://thefinanser.com/2015/06/klarna-chameleon-you-know-something-works-when-its-copied.html/