.svg)
Klarna’s UK business has announced that late payment fees will be returning to the platform, while Klarna’s global business has hit the headlines again following record losses in 2022.
Klarna, the world’s largest buy now, pay later firm (BNPL) by volume, has announced plans to reintroduce capped late payment fees for UK customers.
From March 16, a £5 fee will be charged for each late payment following a seven-day grace period, and after a minimum of four “friendly reminders” have been sent to the customer.
Each fee is capped at 25 percent of the total order value, and no more than two fees per order will be applied.
Previously, until it was scrapped in late 2021, Klarna had charged a £12 fee for each late payment on six- to 36-month credit agreements, but there were no late fees on shorter agreements.
Alongside the reintroduction of late payment fees, Klarna UK will also launch Autopay, a new feature that allows customers to have payments automatically taken from their account. Autopay will only be available on 30-day borrowing agreements.
In a statement, Klarna said the new late fee rules will bring the UK into line with “most” of its other markets, where Klarna also applies capped late payment fees.
Klarna said that by reintroducing late payment fees, the company aims to reduce its number of missed payments “to zero”.
At present, more than 99 percent of UK customers pay back their loans on time, but Klarna believes that having no late fees can incentivise problem spending.
“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 fall behind,” said Alex Marsh, head of Klarna UK.
“It’s like a city with no parking tickets; it sounds great, but in practice turns out to not be so great.”
In a YouGov survey cited by Klarna, 75 percent of British customers said they would be more likely to pay on time if there was a late fee.
Similarly, in the Netherlands and Belgium, Klarna said its internal data shows that applying late fees has increased on-time payments by 20 percent.
“We've concluded that having no fees is not in the best interest of our customers, but we don't want to rely on fees or charge extortionate amounts like traditional banks, who monetise the misery of customers who fall behind,” said Marsh.
“After all, if everyone paid their credit card bill on time, the card companies would go out of business.”
Chris Jones, managing director at UK-based PSE Consulting, said the decision to reintroduce late payment fees is “not a great sign” for Klarna’s business model.
“It implies that they can’t earn enough from merchants to cover their credit risk costs,” he said.
“If merchants don’t pay, it can’t be free to consumers, and the proposition then becomes dead in the water in credit card markets when consumers get 56 days’ free credit.”
Klarna Customer Recovery Programme
Alongside the reintroduction of late payment fees, Klarna UK will also launch a new financial support package designed to help customers who fall behind on payments.
The Klarna Customer Recovery Programme, which will be funded by late fee payments, will allow customers to waive 50 percent of the balance they owe instead of engaging with a debt collection agency.
If the customer opts into the programme, they will be blocked from making additional purchases until they have made a payment for 50 percent of their overdue debt.
At that point, Klarna will consider the debt closed and no further action will be taken.
Klarna said it will also use revenue from late fees to incentivise targeted financial education.
For the first six weeks after the fees are introduced, customers who agree to take a short financial awareness test (the "Never Forget" test) within the app will have their late fees waived.
Klarna said it has taken on board research from Which? and Citizen’s Advice to ensure that late fees are clearly sign-posted throughout the customer journey.
By doing so, Klarna aims to allow customers to borrow only what they can afford to repay.
”This is in stark contrast to traditional banks, which set an ever increasing credit limit and encourage minimum payments, to trap customers into revolving debt with sky-high interest rates,” the company said.
This is not the first time that Klarna has struck out explicitly against its rivals in the banking sector.
Last year, as reported by VIXIO, Klarna exchanged strong words with Barclays following the publication of a Barclays-funded research report showing that up to 900,000 Brits may be over-indebted due to BNPL.
Marsh responded to Barclays directly, calling its research “mind-boggling and irresponsible”. Marsh also pointed out that Barclays offered instead a “high-cost instalment credit product which charges 10.9 percent interest”.
Credit losses multiply in 2022
Looking at Klarna’s full-year 2022 earnings, which were released this week, there are other clues that may help explain its decision to reintroduce late fees in most markets.
In 2022, Klarna reported a record (SEK10.4bn) $1bn net loss, far exceeding its 2021 net loss of SEK7.1bn ($680m).
A significant contributor to this loss was the 12 percent increase in credit losses, which climbed to SEK5.7bn ($550m) in 2022.
This is equivalent to almost 30 percent of Klarna’s total revenue in 2022, which increased 19 percent to SEK19bn ($1.8bn).
These credit losses eat into Klarna’s profitability, and would be a priority item for the company to reduce going forward. The company said that it is aiming to return to profitability in the second half of 2023.
On the plus side, Klarna reported that in Q4 2022 its credit loss rate decreased compared with the same quarter the previous year, falling to an “industry-leading” 0.58 percent as a proportion of total borrowing.
Overall, total gross merchandise value (GMV) across Klarna increased 22 percent in 2022 to SEK837bn ($80bn).
