Is Klarna revolutionising the credit industry?
It’s long been suggested that the younger generation be taught about pensions and investments, tax responsibilities and budgeting in school, so that they’re better equipped to manage their money when out in the world as adults.
Just a few decades ago, consumer credit was a new phenomena. Back in the fifties and sixties, it was expected that you only bought what you could afford, and you didn’t live beyond your means. In the seventies, eighties and nineties, however, the ease at which credit could be acquired led to many thousands of people getting into debt. The Consumer Credit Act subsequently made an effort to regulate the industry, with an insistence that under-18s couldn’t take out credit; they also introduced cooling off periods in some scenarios, to allow consumers time to think over their actions before fully committing to a credit agreement.
In later years, the introduction of doorstep/payday loans made it hard for people already in financial difficulty to escape their situation. Targeting people on low incomes (or none at all, in some cases), these companies’ eye-watering interest rates saw people having to take out secondary loans to help them pay for their original one. There’s little wonder that people unused to managing credit quickly felt like their situation was escaping their control.
Over the last year or so, a new app has arrived, which appears to be revolutionising the way people use credit. Revolutionary because it puts the customer first.
Klarna allows consumers to spread payment for the items they buy over a period of three months; payments can be made weekly or monthly. The twist is that Klarna doesn’t charge their customers any interest. If they purchase an item costing £150, that’s what they’ll pay back, via three monthly payments of £50. Using Klarna only involves a ‘soft’ credit check, and the benefit of no interest certainly makes the app stand out favourably against other financing options.
That Klarna makes its profit via affiliate payments from the shops/brands it collaborates with is fantastic for the consumer. Future purchases can be added to the Klarna account under their own agreements, split into three payments again. Knowing exactly what is coming out that month and when items are fully paid up could really help young people to budget, without any need to save up for the things they desire. That Klarna partners with many brands that would appeal to younger consumers is just one reason why they’re already integral to this age group. At 47 years old, Klarna has only just come onto my radar. When I ask my colleagues in their twenties, they’ve been using Klarna for months.
Klarna also offers a 30-day ‘try before you buy’ option on some purchases. If you return the item within that time—you change your mind, for example—there are no penalties or interest to pay to Klarna. It’s also possible to spread the cost of higher-priced items over a longer period of time, e.g. 3 years; however, this option does incur interest and, perhaps unsurprisingly, involves Klarna carrying out a formal credit search.
It’s hard to think of a downside to this radical way to buy and budget. That said, some users have complained about the company’s operations, i.e. poor customer service, and more worryingly, unwarranted/extra payments being taken out of people’s accounts.
Of course, breaking down the cost of a purchase into small, monthly payments over a period of time is nothing new. For a company to offer this, and to be on the side of the consumer instead of trying to make money from them, however, is certainly a novel approach.
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