Fronting the cost of a new wardrobe by paying in installments is nothing new. Long before they ditched paper catalogues in favour of internet retail, mail order giants like Littlewoods and Freemans let cash-strapped shoppers divvy up a big spree over several monthly pay packets. But the last few years have seen an explosion in slick new ways to split up the cost of your online shopping, helping to propel the pace of fast fashion to dizzying warp speeds.
You might have seen ‘buy now, pay later’ (BNPL) operators Klarna, Clearpay and Laybuy pop up as a form of payment on the checkout page of your online shopping trolley. They’re used by most of the big fashion brands in the UK – but whichever option you plump for, you’re really doing what older generations call “getting into debt”.
Critics say the range of BNPL options and their terms can be so confusing that you might not even know it until you open that letter from a debt collector, and millennials and Gen Zers are an easy target. According to a 2019 report from the Resolution Foundation, real hourly pay for 18-29 year olds in the UK fell 9.2 percent between 2009 and 2014 – but the pressure to consume and spend is higher than ever.
“Young people, generally speaking, have an extremely poor understanding of what credit is and how it works,” says Young Money blogger Iona Bain. “They’re being persuaded to buy more fast fashion products than they really need, because it’s all made so easy. It's not good for your bank balance, and it's not good for the environment – but we’re told it’s a perfectly valid way to shop.”
Swedish firm Klarna, founded in 2005 and now worth $5.5 billion, has gained six million British customers since arriving here in 2014. You’ll find it at 4,500 UK online stores, including the biggies like ASOS and Topshop. (Topshop declined to comment and Asos did not respond to a request for comment.)
It offers three payment methods, including up to three years of traditional-style financing at interest rates a little lower than a credit card. But its two most widespread products – ‘pay in 30 days’ and ‘instalments’ – are genuinely interest-free, and give customers up to a couple of months to pay.
They also involve a ‘soft’ credit check which doesn’t leave a footprint on your record. Regardless of which of Klarna’s three methods you use, failing to pay means your debt is passed to a collection agency. You wouldn’t know that unless you clicked through to Klarna’s T&Cs from whichever store checkout you’ve landed on.
Even then, those “pay in 30 days” terms make no mention of debt collectors. You’ll have to dig out Klarna’s ‘mythbuster’ blog to find it: “If the debt remains unpaid after several months despite multiple payment reminders being sent, the account will be classed as in arrears and then passed to a debt collection agency.”
Klarna – which counts Snoop Dogg among its investors – makes money by taking a small percentage of every sale. They have 85 million customers worldwide, handle a million transactions a day and claim a 68 percent increase in average order value.
“A new way to pay that's an alternative to credit,” their website gushes. In fact, credit is precisely what’s on offer – albeit credit wrapped in millennial-friendly, bubblegum pink branding.
Clearpay – the UK wing of Australian firm Afterpay – is, as the name promises, pretty clear in its terms. Their single product splits the cost into four fortnightly payments. There are extra fees for late payment, which Clearpay warns can be referred to credit reference agencies, affecting your credit score. But again, you’ll have to click through from the checkout page to read the small print. Laybuy works in a similar way but with six weekly installments and – again – fees for late payment, with the added sting of referral to a debt collection agency after 45 days if you've failed to respond to their messages.
If you find yourself confused at checkout, rest assured you’re not alone.
Martyn James is a financial expert who runs Resolver, an online complaints service for consumers. “I’ve worked at the Financial Ombudsman and I’m trained to sell pensions,” he says. “If I found it hard to get to the bottom of all the T&Cs, what chance does the average shopper stand?
“If retailers aren’t clear on what the rules are, it’s not fair. This information should be there at the point of sale, because that’s where you make your decision.”
One big attraction of BNPL is the chance to try before you buy. In theory, it means you can snag a pair of jeans in three different sizes, and send back what you don’t want – all without having your cash tied up pending a refund. Returns cost shops a whopping £70 billion a year. Klarna and Clearpay say BNPL reduces them by a fifth.
“They’re looking for ways to reduce those costs,” says James. “One of them is by making it harder to return things. Most of us think we’re going to be good, but we buy stuff on BNPL and our returns just sit by the front door for a month – and then it’s too late. We’ve bought them!”
James says Resolver has logged almost 10,000 complaints about BNPL since 2018, with over a quarter arising from concerns about charges and fees.
“This is a measure of how fast these new forms of credit have been introduced and adopted,” he explains. “Interest-free deals existed for decades before, of course. The big difference here is how they’ve now evolved to cover pretty much anything purchased at the checkout.
“I’m increasingly concerned that we’re sleepwalking our way into debt without even realising what’s happening.”
A survey released last month by ComparetheMarket claimed two million people have had their credit scores affected by missed BNPL payments. Credit reference agency Experian told VICE that responsible use of BNPL (i.e. paying on time) can be good for your credit score, but counsels: “Failing to meet repayment terms can put an unwelcome debt in your score, so it’s something you want to avoid.”
Debt advice charity StepChange told us that BNPL is a “growing driver of debt” amongst its clients, of which under-25s made up a worrying 14 percent in the first half of 2019. PayPlan, another debt advice provider, saw a month-on-month increase in the number of people owing money to Klarna last year. PayPlan says BNPL debt is always part of a bigger picture, but 152 of those clients ended up in a debt management programme, and three went bankrupt. Their most recent client is just 21 and has debts to Klarna – among a total of almost £12,000 owed.
“What worries me is that some people are turning to BNPL because they can’t get credit anywhere else,” says PayPlan money advice consultant Jane Clack, adding that frivolous shopping is not always to blame: “People are using credit to live. It’s not enough to say people are being silly with their money.”
Klarna UK general manager Luke Griffiths told VICE the firm strives for clarity in its terms. “We use simple language that is jargon free to ensure all of our customers understand what they are signing up for,” he said, adding that Klarna “does not endorse overspending.”
Griffiths added: “Klarna empowers shoppers to budget and pay for products in a manageable and sustainable way. We know that sustainability and ethical consumerism is a priority for many of our merchants and we are here to offer support in any way we can. At Klarna, we have committed to becoming climate neutral and hope we can inspire other companies to do the same thing.”
Laybuy, too, trumpeted its transparency in a statement to VICE, and pointed out that its model – where a sixth of the purchase price is paid at the point of checkout – means shoppers have “skin in the game”, helping mitigate serial returns culture. Clearpay did not respond to a request for comment.
A defining feature of this new breed of BNPL operators is the way they’ve distanced their brands from the familiar tropes of old-school high finance. You’d barely guess from its sleek website and glossy TV adverts, but Klarna is actually a licensed bank – yet you won’t find language like ‘debt’ or ‘loan’ used by any of these schemes when you complete a purchase.
Klarna co-founder Sebastian Siemiatkowski has been vocal about the psychology behind his brand, citing their efforts to “separate buying from paying”. Consumer psychology expert Dr Gareth Harvey of Bangor University sums up the new-style BNPL branding as a deliberate attempt to bypass our natural defences to overspending.
“Usually when we’re making big decisions, for example about financial products, we go through what we call a ‘high involvement process’,” he explains. “Something like Klarna, the way it’s presented, it doesn't feel like a financial product, it just feels like another way to buy something.
“We skip all that high involvement processing and it just becomes habitual decision making. The less involved we are, the easier it becomes, and the less likely we are to work out what the catch is.”
The catch is there – a couple of mouse clicks away – if we care to look. Our bank balances might thank us for a moment’s thought before hitting that checkout button.