How one app turns Millennials and Gen Z into Gen Shop (till you drop)

Search for Klarna on TikTok and you will find young people making light of the debt they have racked up using the wildly popular “buy now, pay later” app. Some dance to the caption “crippling debt” after showing themselves using Klarna when shopping for clothes. Others share videos of payment demands from the company, overlaid with a line from a remixed song: “I know you’re obsessed with me.”

One TikTok video posted by Joella Louisa is captioned, “When you’re wearing a new outfit and Klarna reminds you to pay for it.” She looks elegantly appalled by this unwelcome reality check. It’s not enough to put her off, though. “In the past when I didn’t have money I simply just couldn’t shop,” Louisa tells Bloomberg News. “Now with Klarna, I can.”

It is this double-edged aspect of the “BNPL” [buy now, pay later] craze that is troubling financial regulators: the young fashionistas on TikTok see the potential danger of loading themselves up with short-term debt by using these apps at the checkout, but the temptation can be too great. Credit rating agencies fear that this increasingly ubiquitous financing option might encourage reckless borrowing.

Klarna’s obvious appeal for Millennial and Gen Z shoppers (its average customer age is 33) helped it snag a $45.6bn valuation in a recent funding round led by SoftBank’s Vision Fund 2. The fast-expanding Swedish company, which operates in much of northern Europe, is pushing aggressively into the US. It says it is the world’s most valuable fintech start-up after Stripe. One backer, Chrysalis Investments, told the Times of London that it could be worth $125bn in 18 months, more than HSBC.

Other fortunes are being made in this industry, too. Square, a digital payments platform led by Twitter’s Jack Dorsey, has agreed to acquire Afterpay, an Australian BNPL provider, for $29bn. These upstart fintechs say they are better than credit card firms because they do not charge customers hefty interest payments and fees. “The credit card model is simply unsustainable for consumers,” Klarna’s billionaire founder Sebastian Siemiatkowski told investors last week.

Klarna’s simple, pink-coloured app — which relies on a soft credit check using an algorithm — lets shoppers pay for their purchase up to 30 days later or spread the cost into three or four instalments over a longer time frame. Siemiatkowski says more than 98% of its transactions are interest free.

The fintech makes most of its money by charging the retailer instead, with companies paying up to 3.4% of each transaction plus 20p for the “pay in 30 days” product. Klarna’s 90-million users can use the app at a host of online and brick-and-mortar stores, including ASOS, H&M, Lululemon and Urban Outfitters. The company reckons retailers offering BNPL see an increase of about 45% in average order value.

Shops often incorporate the lender into their own marketing, heavily skewed towards young people: fashion retailer Missguided encourages customers to “look hot now, pay later”, and Boohoo urges: “Don’t wait until payday hon, Boohoo accepts Klarna.”

Regulators are worried

It is this apparently carefree attitude towards credit that has disturbed banking supervisors, especially as the booming BNPL industry remains largely outside their jurisdiction. A review by Britain’s Financial Conduct Authority (FCA) found that the “market more than trebled in size in 2020, poses potential harms to consumers and needs to be brought within regulation”.

Speaking to some Klarna users on TikTok explains the FCA’s misgivings. “It definitely encourages people to spend more, especially when people are paid at the end of the month,” says one shopper, Megan Harkin. “And sometimes when the end of the month comes, you don’t realise how much you’ve spent and then half your wages are gone on Klarna repayments.”

Klarna pushes back against the idea that it spurs overspending, saying that — unlike credit cards — it reassesses customers’ eligibility constantly. “When you apply for a credit card, you immediately get a huge amount of available money and you can spend that entire amount on whatever you want, even if your financial circumstances change over time,” the company says.

“This is far more risky for consumers than Klarna where we check your affordability on each and every purchase, give you a repayment plan to keep you out of debt, and restrict the use of our services if you miss a payment.”

Indeed, BNPL companies are just the latest financial firms — from credit card providers boosting limits to mortgage lenders requiring smaller down payments — trying to strike the balance between lending more to customers to drum up revenue while not pushing those borrowers so far that they fall behind on payments.

Klarna’s app certainly has plenty of fans. Reviews on the UK Trustpilot website show it is more trusted than traditional lenders such as NatWest or Barclaycard. Its fastest-growing demographic is the 40-54 age group.

Nonetheless, there are broader fears about the meaning of the BNPL phenomenon for financial risk more generally. Analysts at Fitch Ratings wrote recently that borrowers could try to get BNPL credit from multiple providers. “BNPL users may find themselves unable to afford the periodic repayments and may turn to credit cards or other forms of high-interest debt to repay BNPL debts,” Fitch said.

Another worry is that shoppers do not always fully understand what they are signing up to. Alice Tapper, founder of personal finance website Go Fund Yourself, first saw a Klarna advert on the London Tube and only realised later it was a credit product. “Buy now, pay later is being dressed up as a glamorous payment option,” she says. “Its true nature as a credit or debt product was really pretty difficult to actually decipher.” Klarna says it is always signposted at checkout with information that makes clear it is credit.

Risk culture

There are also some concerns within Klarna about overly aggressive marketing, according to two former senior employees, who would only speak to Bloomberg News anonymously when discussing internal company matters. They said sales and technology decisions take precedence over credit risk. Klarna says the claims are inaccurate: “Our entire business model revolves around people paying on time and our ability to accurately assess risk. This is, and always has been, a core priority internally.”

Investors, who include Sequoia Capital, Silver Lake and Permira, are only too happy to back a thriving start-up that is now working with 10,000 US retailers, and whose initial public offering may be a year or two away. Yet greater scrutiny is inevitable as Klarna approaches the stock market and BNPL becomes central to the shopping experience.

“Sometimes my debt is €1,000, and I don’t have a good salary,” Louisa concludes. “Klarna makes people into shopping addicts.”

Bloomberg News. More stories like this are available on bloomberg.com