The problem with buy now, pay later

Companies like Klarna have skyrocketed during the pandemic. But their success could have grim implications for sustainability, as well as our mental health

January 19, 2022
An advert for the "shop-now, pay-later" scheme Klarna in a store on Oxford Street, London  Robert Evans / Alamy Stock Photo
An advert for the "shop-now, pay-later" scheme Klarna in a store on Oxford Street, London Robert Evans / Alamy Stock Photo

At the beginning of our neverending pandemic, some well-meaning—albeit naïve—heads theorised that the growing threat of airborne viruses would make us think more deeply about the climate crisis we’re living through. Covid would, the idea posited, force us all to consider reducing own personal consumption, both for ethical and practical reasons (what was the point in buying shit we don’t need online, after all, if we’re intermittently trapped inside our homes, or at least unable to travel and go clubbing). It will not be a spoiler to say that nearly two years on, that utopian dream has not come to pass. Instead, the effects lockdowns and the general ennui of recent years has sent consumption levels higher than ever. The UK's top 100 retailers said their online traffic increased on average by 52 percent during the pandemic, compared to this past summer.

At the same time though, our outgoings have grown too, with figures released last month revealing the cost of living rose by 5.1 percent in the 12 months to November, with inflation reaching its highest rate in 10 years. With the projection that nearly 200m people could lose their jobs in 2022, it follows that consumption is hitting us harder than before. So how are people spending so much? The answer seems to be the “buy now pay later” option, which has become so ubiquitous with online shopping that it has been dubbed “Wonga for millennials.” The rise of companies like Clearpay, PayPal, and the big ‘un, Klarna, has revolutionised how we shop online, making it more accessible and—in the short term at least—a hell of a lot cheaper to buy enough Urban Outfitters corsets to post an enviable haul on TikTok. The Swedish fintech company has enjoyed the fruits of that popularity, recording an eye-watering value of $45.6bn last year, and closing 2021 by launching its own interest free Klarna card (after claiming, handily that it was credit cards, not buy now pay later services, which posed the real risk to finance and consumption). 

It’s true, of course, that Klarna is not the only buy now pay later company contributing to these issues. It’s just the biggest (so far at least; in July this year Apple was reportedly planning its own version). And certainly it is aware of the reputation of buy now pay later—a Guardian article from 2021 credited the system with contributing to comfort shopping and creating a new generation of debtors—which no doubt encouraged it to introduce the Pay Now option in 2021. Klarna’s co-founder and CEO Sebastian Siemiatkowski has been outspoken about sustainability, and has announced a “1 percent pledge,” whereby the fintech company has committed to allocate $10m of its most recent $1bn funding round to climate change initiatives. “We work with fast fashion, but we also work with the Allbirds [an eco-friendly shoe range] of this world,” Siemiatkowski said in an interview last year, ahead of Klarna’s multi-billion dollar valuation. “We try to promote consumers taking good decisions.” As with all discussions of sustainability in consumption though, it’s difficult to tell what is lip service, what is greenwashing and what is real. Certainly, even with Klarna’s top-level focus on sustainability, they cannot—and why would they?—truly monitor or control the financial decisions of their users. 

“I ordered some clothes for a recent holiday from Asos and used Klarna so I would have more spending money,” says Joe*. “When they turned up the quality was shit—not surprised—so I returned them. I assumed I wouldn’t have to pay anything at all for this, but then I got some letters asking me to repay the next day postage fee to Klarna. It wasn’t anything hostile, but I’m in debt to them for that £5.95.”

“I used to buy things in a few different sizes at the same time on Klarna, as well as for different reasons,” says Gemma*, “so when I returned stuff it was always a bit stressful. A few times the returns got delayed on the way back and I got letters from Klarna as I was overdue on payments, and that was a bit alarming.” 

“To help customers stay on top of their payments we make sure we stay in regular contact with them to let them know when a payment is due—and only a very small minority of our customers don’t pay within the time period,” says Klarna. “Customers with an outstanding balance are not able to use our product again in the future. We also have a dedicated team—available 24/7— who work with customers identified as in financial distress to find a solution that is appropriate for them.”

This incredibly small-scale debt might seem like no big deal (Gemma adds too, that Klarna has introduced an option to report late returns so the repayment is delayed), but recent reporting has revealed the grim reality of what happens to our returns when we shop like this. Even excluding the carbon costs of shipping and returning items, many refunded or exchanged online orders do not, as we might expect, go back into other people’s baskets. Instead, the five billion pounds of waste generated in returns every year goes largely to landfill.

“If Klarna (or similar services) is someone's first experience of borrowing money, then I think it's very easy to fall into debt,” says Sarah*, who has shopped with the platform in the past. “It doesn't appear to be policed very well, and it can encourage a ‘I can't afford this right now, so I'll just use Klarna’ mentality. I think it's very easy for young people to think of it as ‘free money’, especially with how it's marketed.” 

“The app constantly logs me out,” she adds, “so I don't receive any reminder notifications. And there isn't a thorough sign-up process either. I do think if people are low on money and know they can use Klarna at specific online stores, they will sway more towards buying from the fast fashion brands, because the majority of the retailers Klarna works with are fast fashion.” 

Financial insecurity, and financial worry, has been named as a huge contributor to poor mental health outcomes, especially for millennials and Gen Z, and with the economic fallout of Covid still to fully materialise for young people just entering the rental or job market, it follows that that anxiety will only get worse. It’s around this time of year usually when our resolutions look towards saving more or consuming less. So maybe 2022 is the perfect time to make a resolution to part with Klarna. Or at least go on a break. Like the company says themselves, there’s always later. 

*All names have been changed