Before we start with the ins and outs of why Buy Now Pay Later (BNPL) companies like Klarna are so good at what they do, let’s get something straight. When Charlie Youakim, CEO of Sezzle (a BNPL company) was asked in an interview ‘Why is BNPL so popular?’ He replied:
“BNPLs help to avoid credit card interest and make purchases that normally would not fit in your budget.” (1)
The intentions of BNPL companies are to allow you to make purchases that you can’t really afford. In other words, they’re here to enable you. If you let them. A lot of people do, and it’s because with BNPL buying something doesn’t really feel like buying something. This isn’t accidental, and is completely by design.
Studies have shown that humans are angled towards minimising losses, losing anything (2). This includes money, and so there’s a certain amount of ‘pain’ associated in our minds triggered by parting with it.
A study in 2001 by Soman (3) hosted an auction, and discovered that bidders bid significantly more for a pair of tickets paying by credit card than the group that had to pay by cash. The more disconnected the payment method is to the reality of paying for something, the more you’re willing to pay. Money becomes a vague idea, instead of cash that you’ve earned with your time that you’re parting with. Which is why with Klarna you can spend much more than you actually would if you were paying with cash at the time, as 55% of consumers spent more money when using BNPL at checkout compared to a different type of payment (4). The StepChange advice for people considering to use BNPL services like Klarna is: If BNPL was not available, would you still make the purchase? (5)
Without the psychological ‘pain’ to indicate paying as part of the buying process, it’s never been easier to be exploited. It’s like if all of the traffic lights got taken off the road, there’s no indication of when to stop or slow down, so we can assume ‘go’ is safe. BNPL companies like Klarna are taking traffic lights off the road and refusing to look at the car crashes.
Klarna encourages people to make purchases outside of their usual budget. Purchasing from luxury brands you wouldn’t have considered without Klarna, because of the price. As Macklemore said, “Fifty dollars for a T-shirt...I call that getting tricked by business”. But paying £17 over 3 months, that’s a deal? Net-a-porter, Space NK and even Bulgari allow people to buy now and pay later, with Bulgari having a generous £3700 limit for Klarna users. The idea is to let people spend outside their means, and hope that it works out. But it often doesn’t. With Klarna’s official repayment time being 60 days, the average time it takes someone to pay back their Klarna debt is 152 days (6).
Klarna tricks us into becoming a different kind of consumer. The consistent nudging to become someone that spends more than they have results in identifying as someone that has more money than they actually do. There’s a danger of spending more on the unnecessary and having less than you thought for the necessary purchases, especially as inflation has reduced the buying power of our money and sent prices for essentials skyrocketing.
Using Klarna is a dream for online companies and payment providers. By falling into this trap, we become their ideal customer. Someone who says yes without considering their financial situation and buys. Not using BNPL isn’t just about saving your money, it’s protecting your self-control and your autonomy. It’s guarding your freedom to make decisions that benefit you. It’s important, perhaps more important than we think right now, to understand exactly how these companies work in order to protect ourselves.
Klarna releasing a physical card threatens to take further advantage of people’s weaknesses - impulse buying and emotional spending - instead of genuinely supporting people with their money. The looming cost of living crisis and rising inflation have plunged a lot of people into financial hardship, and Klarna threatens to worsen those difficulties. So our advice to you? Think twice before getting the new Klarna card!