The Beauty You Owe: Klarna & the Buy Now, Pay Later Revolution
If you’re one to indulge in a fair share of online shopping, you’ve already encountered it countless times: An eye-catching “buy now, pay later” option at the bottom of your checkout cart, allowing you to treat yourself to the products you want now and pay later with installments over a chosen set period of time.
Marketed as interest-free and easily manageable, BNPL services are becoming increasingly popular especially among Millennials and Gen Z shoppers. Services like Klarna, Clearpay, and Afterpay are spearheading a profound change in our consumption habits, especially within the world of beauty, fashion, and gaming/electronics where shoppers have no access to credit cards or are afraid to indulge via credit cards for fear of accumulating debt.
Chasing instant gratification before all else and the desire to live above one’s means are really nothing new, but the way that these “BNPL – buy now, pay later” services are leveraging these behavioral tendencies to dominate the online shopping landscape is, in a way, quite revolutionary or disturbing depending on whom you ask and how the services are used.
So, what has made the Klarna model so successful, and what could be the consequences of an online industry so influenced by microloans/debt?
The Power of Now
The Swedish giant Klarna, arguably the best-known fintech company offering these services, begins its story as far back as 2005. The company comes to dominate the online shopping world in the late 2010s (thanks, in part, to an ambitious and well-aimed social media marketing campaign) and experiences unprecedented growth during the 2020 and 2021 pandemic.
Klarna allows shoppers to make purchases from their favorite online retailers without completing the full payment at checkout, giving them the option to divide their payment into four easy, interest-free installments (automatically charged every two weeks), use monthly financing, or pay in 30 days from purchase.
The company’s motto and mission have always been to make online shopping frictionless and easy — payments included.
Klarna estimates that the ability for consumers to pay on installment boosts their average order value by 45% and that those financing their purchases tend to spend 58% more on average.
It was only a matter of time until Klarna, along with fellow financial tech giants like Clearpay, would come under fire for the very reason for their success: Making microloans/debt readily available and even desirable to young shoppers, without regulation.
The proof’s in the branding: Sleek, pastel pink, unapologetically young and dynamic.
Klarna clearly knows its audience and knows where to find them, enlisting the help of Instagram influencers and hip celebrities to share the #WhyPayInterest gospel far and wide.
Millennials and Gen-Zers, long demonized for being the culprits behind the age of instant gratification, have been the primary target of “buy now, pay later” credit models, and there’s nothing like pervasive FOMO and an appearance-obsessed culture fueled by social media to boost the popularity of microloans even further.
Lending A Helping Hand or Normalizing Debt?
While Klarna’s initial appeal was all about trying products on before paying, making returns a whole lot easier, it’s clear that many cash-strapped Millennials have started to rely on the credit service to get the hottest outfit or beauty product before payday.
And with the promise of no interest, how could credit services like Klarna be nothing more than a helpful way of making unaffordable items more accessible to all?
According to critics, the key issue is transparency, along with the downplaying of what using these services might mean for your credit.
While shoppers won’t be subjected to any interest fees, missed payments will affect your credit score, as Klarna will pass on your information to debt collection agencies.
Plus, most aren’t aware of the late fees!
And what of all the payments one makes on time? Is it going to improve one’s credit scores when utilizing BNPL services in a disciplined way? As of now, the answer is no. Timely payments are not taken into account or reported, so shoppers have no opportunity to build credit history.
On top of that, using Klarna has been associated with a drastic increase in online shopping and impulsive spending (it’s how the firm makes money after all), leading many to criticize the credit service for nurturing unethical and unsustainable overconsumption.
Klarna will make a hashtag out of not charging interest, yet minimize the profound impact that a dent in a young person’s credit score can have. Issues with money management and the gradual acclimation to micro debt might lead to more severe financial troubles in the future, so it’s not surprising that the company’s aggressive marketing focus on young shoppers has been put under a microscope.
And what does this scrutinization mean for brands who choose to integrate “buy now, pay later” services, seduced by the considerable sales boost they tend to bring along?
Some might say that if credit firms like Klarna and Clearpay are quietly fostering a new culture of overspending and debt-fueling instant gratification, ethical beauty and fashion brands should start rethinking their partnership choices. Others might see no harm done, with microloans helping make buying and consumption more equal, and even helping teach the ins and outs of debt management to younger generations.
Wherever you might fall between the two camps, one thing is clear: Klarna is not going anywhere, so it’s once again up to consumers to do their research, weigh the pros and cons, and engage in mindful consumption in the way that suits them best.
Just don’t forget to check your credit score every once in a while!