Klarna, the buy-now-pay-later (BNPL) quadradecacorn, will shake up its business model in the Nordics by putting an end to revolving credits and unnecessary fees. But while the online shopping company continues to present itself as a fairer alternative to traditional banks and lenders, it is facing a backlash over customers’ financial wellbeing.

The news of Klarna’s partial overhaul comes after the BNPL market exploded during Covid-19. It is expected to be worth $166bn by 2023, according to GlobalData’s thematic research.

However, the skyrocketing popularity of instalment apps like Klarna, LayBuy and Affirm has grown in tandem with regulators like the Financial Conduct Authority (FCA) and Swedish authorities taking an interest in the sector. As a result, lawmakers around the world are increasingly investigating the risk of BNPL providers putting profits ahead of customers’ financial wellbeing.

In response to these critical examinations, Klarna has been busy presenting itself as a leader in consumer protection. Over the past few months, the Stockholm-headquartered fintech has launched a price-comparison site and repeated the claim that it is less dangerous for users’ financial health than traditional credit card companies.

It is against this background that Klarna has now announced plans to shake up its business model in the Nordics. Sebastian Siemiatkowski, founder and CEO of Klarna, first flagged for the inbound reform in an interview in Svenska Dagbladet Näringsliv over the weekend. The $45.6bn fintech then followed up with an official statement on Monday, outlining the new changes.

“Today we’re so big that we have both an opportunity and a responsibility to make a positive difference,” said Siemiatkowski. “We can do that by improving the general understanding and expose the downsides of the credit market, but the biggest impact we can have is by acting ourselves. Among other things, we’re now going to remove all unnecessary fees, give customers more tools to pay in time and remove revolving credits.”

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By GlobalData

The first massive change is, as Siemiatkowski noted, to get rid of revolving credits. Siemiatkowski refers to them as “oändlighetskrediter” in Swedish, which directly translates to “infinity credits”. But no matter what you call them, they basically refer to the same thing: a line of credit that has no end date or a fixed number of payments. One of the most common types of revolving credits are the type provided by credit card companies.

Despite their popularity, Klarna argued that revolving credits put customers at risk of falling down a “credit trap” with high interest fees. Subsequently, Klarna has now ditched its own line of revolving credit service in the Nordics.

The fintech also announced that it will do away with “unnecessary fees” and to make it easier for customers to manage their accounts. The unnecessary fees ditched include start and administration fees. This means customers will only have to keep abreast of pre-defined interest fees and instalments.

The BNPL leader argued that credit companies “lure in” people by offering low interest rates, but then make them pay massive hidden fees.

Klarna also extended the period for customers to make a payment from 14 to 30 days to better coincide with monthly pay cheques. Net 30 makes sense in Scandinavia given monthly salaries are standard in the region.

Moreover, Klarna will increase the frequency of so-called “friendly reminders” that payments are due. Having previously sent reminders in the app two days before a due payment, the fintech will now also send one on the day after a due payment. Additionally, the ecommerce company will trial sending notifications via texts and emails to reduce the risk of customers missing payment and incur higher fees.

“We are continuing to work on strengthening consumer protection and to shine a light on the biggest debt traps: from revolving credits to market participants using consumer data to advertise unsecured loans,” Siemiatkowski said, adding that he envisions Klarna leading the way when it comes to sustainable payment solutions.

Klarna credits in a growing market

Klarna’s moves away from revolving credits and toward consumer protection efforts in the Nordics come as the BNPL market is getting increasingly crowded.

US payment company Square is the latest to make a foray into the BNPL market, having announced plans to buy Australian Afterpay for $29bn in August.

PayPal, the grandfather of fintech, has also muscled into the sector over the past year by launching instalment services on both sides of the Atlantic.

Credit card companies Mastercard and American Express have also announced plans to start providing BNPL services. Apple is also rumoured to be planning to add a BNPL feature to its fintech services.

Smaller startups like Zilch have also entered the fray while fintechs that haven’t traditionally offered BNPL services – such as Danish challenger bank Lunar – have also launched their own instalment features.

Faced with the growing competition, Klarna raised a $639m SoftBank-led investment round in June to strengthen its position in the market. The raise saw it achieve a $45.6bn valuation.

However, it’s also clear that some of that money has been put towards protecting its brand as it is coming under pressure from regulators and consumer organisations to prove its protection of users.

Just last week, the UK market watchdog Citizens Advice warned that one in 10 BNPL shoppers have been chased by debt collectors.

Klarna was quick to reply to the Citizens Advice’s research, saying the issue wasn’t that bad among its seven million UK customers.

“At Klarna we only ever use debt collection agencies to help us contact customers we are unable to reach and we do this on fewer than 1% of orders,” Alex Marsh, head of Klarna UK, told The Independent.

“The debt collection agencies we work with are all FCA authorised and will only contact customers by telephone or email and do not use bailiffs. We encourage any of our customers whose circumstances have changed, to please get in touch so we can help you with a plan to get back on track.”