Are lending schemes like Klarna luring Gen Z into debt?

Addictive buy now, pay later services designed to encourage overspending have sparked concerns as vulnerable young consumers find themselves in mounting debt.

Since the start of lockdown, 23% of 18 to 24-year olds have turned to buy now, pay later services (BNPL) when shopping online, contributing to a shocking spike in bankruptcies within the age group. Designed to encourage overspending, these schemes have emerged as the ‘new normal’ for young, cash-strapped consumers, who are enticed by the option to get what they want, when they want – even if it isn’t financially viable.

With the shift from physical to online retail due to forced store closures worldwide, a significant influx of shoppers using BNPL schemes has arisen. Being able to return items without losing a dime is useful because it brings the changing room to the home, but it often leads to an impossible game of catch-up where young consumers end up spending far beyond their means, disregarding the negative implications that may follow.

‘We don’t think retail checkouts should default to a buy now, pay later payment unless the consumer actively chooses that option,’ says Sue Anderson of debt charity, StepChange. ‘It gives people the chance to defer thinking about affordability at the point of sale and potentially encourages them to postpone that consideration until the point at which they actually have to pay.’

While it may sound like a dream-come-true, the issue lies in the fact that firms like Swedish start-up Klarna – popular for allowing shoppers to buy items without paying anything upfront – have not been forthcoming with information regarding the risks to consumers’ finances in their adverts.

In fact, these schemes have the potential to be very damaging, affecting credit scores if bills are left unpaid and passed onto debt collection agencies.

Although they’re not all-bad and can be hugely beneficial for savvy shoppers when used well, amidst reports of court hearings following naïve sign-ups, what’s clear is that consequences are relatively detrimental when BNPL isn’t approached with caution.

‘I was 18 at the time and I wasn’t aware that I had to manually set up a direct debit,’ says Poppy Billingham, whose been paying off £3,000 worth of BNPL debt for the last three years. ‘No one teaches you about borrowing money and getting in years worth of debt for a £45 Topshop dress’.

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#klarNAA Today I’m launching a campaign urgently calling for better regulation to protect young and vulnerable consumers from misleading Buy Now Pay Later products ⁠⚠️ #RegulateBuyNowPayLater⁠ ⁠ I need your help! If you’re on board, here’s how to support in 3 mins 👇⁠ ⁠ 1️⃣ Share this far and wide⁠ 2️⃣ Sign and share the Change petition. Link-in-bio.⁠ 3️⃣ Tweet – Link in bio for a tweet in one click. Tag your MP⁠ if you can.⁠ ⁠ A quick thing….I know that these services can be useful and used well. If that’s you, that’s cool. Just hear me out. ⁠ ⁠ Buy now pay later is becoming the new normal. It’s here to stay. HOWEVER, as with all financial products, it’s important that consumers are adequately protected and told upfront about risk. This isn’t the case with BNPL and the regulators have some catching up to do. ⁠ ⁠ Over the last few months, I've been investigating the stories of people who have been misled by BNPL and looking into the regulatory gaps which desperately need closing⁠. You can read some of these stories on the campaign page (link-in-bio)⁠ ⁠ There are two big worries:⁠ 1. Lack of regulation around advertising⁠ 2. Lack of consumer protection, particularly at checkout ⁠ ⁠ Why are you going after Klarna? ⁠🤔 I’m not solely, we need ALL BNPL providers to be better regulated but in terms of these issues, Klarna has a long way to go⁠ ⁠ For more information on the campaign, the issues, proposed solutions and your stories please take a look at the campaign website (link in bio). ⁠ ⁠ ⁠ Thank you for your support. Alice x ⁠ ⁠ ⁠ ⁠ ⁠ ⁠ ⁠ ⁠ #protectyoungconsumers #regulatebuynowpaylater #consumerrights #consumer_protection #klarna #klarnaa #mindfulconsumption #smartshopper #smartshopping #debtfree #livelikenooneelse #debtfreejourney #debtfreecommunity⁠ ⁠ ⁠

A post shared by GO FUND YOURSELF®| Money talk (@go_fund_yourself_) on

Now, critics are calling on companies like Klarna to take responsibility and make their terms as explicit as possible from the outset.

Given that leading retailers such as & Other Stories, ASOS and Weekday currently promote Klarna above alternative payment methods when shoppers reach checkout on their websites, it’s never been more important to emphasise the perils of poor choices that BNPL can frequently involve.

In light of fears that the majority of consumers do not fully understand what they’re getting themselves into, financial campaigner and author of personal finance book Go Fund Yourself Alice Tapper has launched a petition asking for more regulations on the BNPL industry.

‘As we have gained more users and awareness of our product and brand it’s incumbent on us to inform consumers,’ she explains. ‘So we’re helping them to manage the way in which they budget and use their money, and they’re utilising services such as ours to spread the cost of purchases.’

It’s incredibly easy to be drawn in by the brand’s pink, optimistic image, but at present there is nothing to counterbalance its blatant overlooking of the very serious subject of debt. As a responsible lender, Klarna – and others like it – is, above all else, obliged to educate. And, as for now, treat BNPL shopping like gambling – it’s highly addictive and must be regulated accordingly.

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