Klarna is the latest Buy Now Pay Later firm to introduce a late fee, after its boss said customers were more likely to slip into debt if there were no consequences if they skipped a payment.
From March 16, customers who miss their repayments will be charged a £5 fee, in a major shift by the company, which has up to now not charged late fees in the UK. Until now, Klarna had been one of the only major Buy Now Pay Later (BNPL) providers to not charge any late payment fees, with Laybuy and Clearpay, both charging a £6 late fee to shoppers.
The BNPL firm says it's introducing late payment fees because its data shows they reduce the likelihood of borrowers falling behind on payments. It says fees have improved on-time payments by 20% in the Netherlands and Belgium, and boss of Klarna UK Alex Marsh says the move is aimed to help curb loan defaults as more shoppers use the payment method amid the cost of living crisis.
Alex Marsh, head of Klarna UK, told City AM : "Not charging fees feels consumer-friendly, but we’re worried it drives the wrong behaviour. Our data now shows that a total absence of late fees actually leads to less favourable outcomes for customers: with less reason to pay on time, customers are more likely to miss a payment. In the Netherlands and Belgium, the introduction of late fees improved Klarna’s on-time payments by 20%."
The move comes weeks after the Government published draft laws to bring BNPL services into regulation and give borrowers rights and protections, although the new rules won't be in place for months yet. Mr March said the funds collected by the company through late fees would be used to "directly support customers who have fallen behind" and said that later this year Klarna will be launching its "customer recovery programme" which will "proactively contact customers with long-overdue payments and offer to waive 50% of their balance".
Klarna now shares payment information to credit agencies, which it said helps consumers who pay on time demonstrate "positive use of credit" and "helps protect consumers from building up unsustainable credit with multiple credit providers".
What is BNPL?
Instead of paying at the till or online checkout, the BNPL firm pays the retailer on your behalf and you agree to pay the BNPL firm back over a few weeks or months, spreading your shopping costs interest-free.
How Klarna's fees will work
- The fees will take effect for new orders made on or after 16 March 2023;
- Each late payment fee will be up to £5. The standard fee will be £5 to orders of £20 or more;
- You won't be charged more than 25% of your order value as a fee, so if your order is under £20, the fee will be less than £5;
- You'll only be charged a maximum of two late fees for the same order;
- If you miss a payment, you'll have a week to pay it before being charged a fee;
- Klarna will send at least four reminders before charging a fee;
- For six weeks from April 21, late fees will be waived for those who take a 'financial awareness' test in the Klarna app.
A consultation was launched by the HM Treasury last month to look at how BNPL products could be brought under Financial Conduct Authority (FCA) regulation.
While BNPL has surged in popularity, particularly among young people, the lenders remain largely unregulated, raising concerns about people falling into debt. Britain's buy-now pay-later sector nearly quadrupled in size during the pandemic in 2020 to £2.7bn. The Government first promised to regulate the sector in 2021, and has been "painfully slow" in bringing legislation forward, according to consumer champion Martin Lewis. Last February, the Financial Conduct Authority (FCA) told the four biggest buy-now pay-later operators to change their contracts after identifying potential harm to customers. Currently, customers who are not happy with any of the BNPL companies have to use consumer rights law, which is not overseen by the FCA.
If BNPL firms are briought under Financial Conduct Authority (FCA) regulation, customers will be able to take complaints about BNPL companies to the Financial Ombudsman and providers would also be responsible for checking loans are genuinely affordable for customers, as well as providing clear information about the terms and conditions of borrowing.
To get the latest money news direct to your inbox, click here.
Read more:
- Cost of living: A five-step plan to get debt free in 2023
- How to get help if you’re struggling with the cost of food - including voucher schemes
- All the big money changes to look out for in 2023 month by month
- DWP Universal Credit claimants hit as sanctions rise by 250% amid claims they are 'back with a vengeance'
- Newcastle pub chain serves up tasty offers on meals and breakfasts for cost-conscious diners
