Since Afterpay launched in 2014, they've revolutionised the credit landscape. Younger people are turning away from credit cards due to their high interest rates and the rise of debit cards. Now many other companies are scrambling to get into the Buy Now Pay Later space. Enter Klarna.
Overview:
What is Klarna?
You may have seen their distinctive pink stickers in shopping centres advertising their services, and wondered what they are all about. You've come to the right place. We're going to take a deep dive into Klarna, and compare it with the biggest competitors.
Klarna is a Swedish company founded in 2005. The are currently Europe's biggest Buy Now Pay Later company and have expanded into the US and are now on our shores. They are partnered with Commonwealth bank to bring Buy Now Pay Later services into mainstream banking. You can now log into Klarna through the Commonwealth banking app, making it easier for users to access the service. It also give Commonwealth bank customers an easy new way to access small amounts of credit.
Who owns Klarna
Klarna was founded by Sebastian Siemiatkowski, who still owns 8.1% of the company. The rest is owned by a combination of private investors including Dragoneer investment group, HMI Capital, Merian Chrysalis Investment Company and Commonwealth bank Australia. Whilst they are closely affiliated in Australia, Klarna are not wholly owned by Commonwealth. However, the bank does have a 5.5% stake in the company and is propelling Klarna's expansion into Australia.
How does Klarna work?
Klarna works in a very similar way to Afterpay. You apply for an account and make your purchases using a code or through the app. Your purchase is then broken into 4 instalments paid every two weeks. The first payment is usually due at the time of purchase for physical stores, and at the time of shipping for online purchases. The subsequent payments will be due every 2 weeks after that.
Is Klarna the same as Afterpay?
Well yes, and no. They have a similar payment structure to Afterpay, where you break your purchase into 4 instalments. This is unlike Zip Pay, which functions more like a credit card, letting you make purchases and pay a lump sum each month. For a comparison between Afterpay and Zip Pay, have a look at this article.
What makes Klarna different?
The main thing that sets Klarna apart is it's rewards program. I've said before in my review of Buy Now Pay Later services that they are replacing credit cards. So Klarna is the equivalent of a rewards card. Their rewards club and has discounts and deals built into the app.
You automatically join their club when you sign up for an account, and earn 1 point for every dollar spent. You can redeem rewards for gift cards from places like Uber Eats, JB Hifi and more. They also have discounts when shopping within their app
How does Klarna make money?
Klarna's main source of income is merchant fees. They charge a $0.30 transaction fee as well as a percentage of the transaction price. So why do retailers want to give away a portion of their earnings to have Klarna as a payment method? Because it increase their sales! People spend more when they are buying on credit, and the more options you give them the better.
They also make a portion of their money off late fees and snooze fees.
How to Use Klarna
To use Klarna, you can shop as normal and select Klarna as the payment method at the time of purchase. If the store does not accept Klarna, you can use the app to generate a single use "ghost card" that operates like a debit card. This means you can literally shop anywhere, whether they accept Klarna or not.
Does Klarna have a minimum purchase amount?
Yes. The minimum purchase amount is $10. So you probably can't use Klarna to pay your coffee, and if you do, you need a new coffee place!
Is Klarna safe?
As with all Buy Now Pay Later services, Klarna invests in cybersecurity. So if you are using it to shop online, it acts as an extra layer of security as opposed to just inputting your card details. They are also partnered with Commonwealth bank in Australia. Having the backing of a big bank should give you confidence that they are legit.
Does Klarna credit check?
Yes, Klarna will conduct a credit check before apporving your account. According to their website, it will not impact your credit score, but will be visible to other lenders. That sounds like a hard inquiry to me, so I'm not sure what basis they have in saying it won't affect your credit score. As for all inquiries, it will reduce your score fractionally in the short term. The biggest impact on your credit score from using Klarna is missing payments. If you miss too many payments, Klarna may lodge a default on your credit file, and that is bad news! Also, using a lot of any Buy Now Pay Later services may affect your creditworthiness in the eyes of lenders, even if you are making the payments.
Does Klarna build credit?
No, not really. The best way to build credit is to pay your bills on time and keep your credit card balance low. Opening accounts just to build a credit rating is not a good idea, as too many hard inquiries on your account actually decreases your rating.
How much do you pay upfront with Klarna?
As with Afterpay, you normally have to make an upfront payment with Klarna. The first of the 4 instalments is due at the time of purchase when shopping instore, or at the time of shipping when shopping online. This first payment is 25% or one quarter of the purchase price.
What fees does Klarna charge?
Klarna announced that they will not charge late fees when they first launch the product. They have not announced yet when these fees will come into effect, but here is a rundown on the fees mentioned in their terms and conditions:
Late Fees
$3 per instalment for purchases under $60
$5 per instalment for purchases between $60 and $100
$7 per instalment for purchases between $100 and $200
$15 per instalment for purchases over $200
Transaction Fee: $0.30
Klarna are pretty quiet about what fees they charge. It took a lot of digging around to find this information, which straight away sets off alarm bells for me. Klarna also charges "snooze fees, which you can read about below.
What is Klarna snooze?
Klarna snooze lets you extend your next repayment by 14 days to avoid incurring a late fee. The snooze itself does cost a small fee however. You can only snooze once per order. The Klarna snooze fees depend on your payment amount
Snooze Fees
Under $60 not available
Between $60 and $100 $3
Between $100 and $200 $5
Over $200 $7
As you can see, the snooze fee is very closely related to the late fee, and is one tier cheaper than the late fee, so if you are short one week and need to delay a payment, it is worth it. It's still not a good habit to get into though. You know what is a good habit? Saving money.
What happens when you miss a payment?
When you miss a payment, you will be notified via the app, and will be a given a "slack period" of 2 to 7 days to update your payment information. Once updated, the transaction will be attempted again. If not, the transcation will just be attempted on your original card after 2 to 7 days.
If it is still not successful, you are charged a late fee and the missed amount is rolled over to your next due date, meaning a double payment will come out of your account. It is in your best interest to try to make up the payment before this date, or you may find yourself suddenly short of cash.
Does Klarna charge interest?
No, Klarna does not charge interest, although it claims that interest may apply to some specific services, it does not mention where they are or link to where you can find more info about these "specific services".
What stores accept Klarna?
A lot of stores are now accepting Klarna. ONe cool feature of this Buy Now Pay later service is that if a reatiler does not accept Klarna, you can still use it as a payment method for purchases. Klarna features a "ghost card" that functions like a regular debit or credit card, meaning you can use it anywhere that accepts debit or credit cards as a payment method. The "ghost card" is a virtual debit card, similar to Google Pay.
Can I use Klarna to pay bills?
Because of this ghost card functionality, you can use Klarna to pay for bills, as long as they are within your credit limit. This is a handy difference between Klarna and Afterpay.
Cancellations, Refunds and Disputes
If you cancel your purchase or return the good, Klarna will waive the amount you owe them. However, you will have to wait for the store you purchased from the return the funds to Klarna. Any money you have already will be refunded to you.
Is Klarna worth it?
This depends on what you are looking for. If you want something that is accepted anywhere and everywhere, I'd say Klarna is a good option. Their built in "ghost card"feature is pretty handy. Personally, I think Zip Pay is better, because you can make multiple purchases and just pay a monthly instalment, rather than having multiple payments coming out here and there. But that's me.
Good for:
Splitting large purchases into manageable payments
Shopping anywhere online and offline
Not so good for:
Managing timing of payments
The Bottom Line
I feel like this is rapidly becoming a tradition when reviewing credit services, but I'll say it again. Use your own money! There is nothing more satisfying that building a savings account! Read this article on saving money and try a few of the strategies and tell me you don't love it! Being secure financially is the best thing you can do for your future, and your present. I'll end with my favourite quote.
"The best time to plant a tree is 10 years ago. The second best time is now".