Shao Hung Chen, 23, has sworn Klarna for good after he “unwittingly” dipped into his inheritance to pay late fees on an expensive mattress. He told Morning Brew that a few months into his 18-month finance plan, Klarna mistakenly charged him a late fee, driving up his monthly bill.
Frustrated by what he called “this mess”, he wrote in a post on the r/Klarna subreddit that he feared the buy now, pay later (BNPL) service would lead to collections. Instead of facing this grim possibility, he took money from his inheritance and paid the bill in full, relieved that he had “not taken credit yet”.
“I don’t do business with people who waste my money,” he told Morning Brew.
Chen’s experience with Klarna isn’t particularly unusual – r/Klarna is full of messages from confused and irritated users. BNPL’s services are largely unregulated, leaving consumers like Chen in the dark about what, if any, protection they have. This confusion became even more apparent when Klarna and its competitors, Afterpay and Affirm, exploded during the pandemic.
In 2020, Gen Z and Millennials purchased around $19 billion worth of products using BNPL, according to estimates by US credit rating agency Fitch Ratings. It was during the height of the Covid lockdowns, when Americans were buying home gym equipment and home goods, seemingly unwilling to charge a credit card for those purchases. That $19 billion represented impressive growth for BNPL, doubling 2019 figures. Fitch Ratings denounced the market’s “opaque reporting and loose regulations” in a July 2021 report.
The silver lining of Chen’s experience at Klarna is that it didn’t end up affecting his credit score, but if his account had late payments at the end of February, when new changes to BNPL services take effect, his credit score could have plunged. . Currently, what BNPL companies report to the credit bureaus differs from company to company; some disclose overdue payments to bureaus, which are reflected in credit reports, and some report absolutely nothing. Klarna said in an email to Morning Brew that it never reported anything to the three major US credit bureaus: Experian, Equifax and TransUnion.
Credit bureaus want to change that.
Equifax told Morning Brew that it is actively encouraging BNPL companies like Afterpay and Klarna to report consumer debt starting in late February. Experian announced on January 27 the opening of a “specialty office” focused solely on BNPL transactions this spring. Experian’s Buy Now Pay Later desk will provide lenders with real-time analytics on BNPL, which it calls a “blind spot in credit transparency.”
Once those millions of BNPL transactions start showing up on credit reports, individuals’ scores could drop if those doses of retail therapy are paid late or not paid in full. On the other hand, since many BNPL users are younger, so are their credit histories: in cases where buyers regularly pay their BNPL bills on time, this will serve to prove to the credit bureaus that one can trust them to pay. debt and will help raise their scores.
It’s not just credit bureaus that have taken notice of the BNPL industry – the Consumer Financial Protection Bureau (CFPB) is also paying attention to it for two reasons. First, the CFPB is concerned that BNPL companies collect data on their customers’ spending habits and fail to disclose certain fees and handle customer disputes satisfactorily. Second, they fear that consumers will take on more debt than they anticipated. BNPL apps are easy to use and attractively marketed – like Afterpay’s clean mint green and Klarna’s “pink and energetic” branding – it’s no surprise that BNPL services have found their way to websites from Nike and Urban Outfitters to even smaller Instagram stores. Additionally, with certain promotions, shoppers can get gift cards from places like Sephora or Amazon if they pay with Klarna.
Consumers can turn to Afterpay if they want to order multiple sizes of an item of clothing at once to find the right fit for dresses from Anthropologie or leggings from Fabletics. That’s what Ashley Reese, a 31-year-old Netflix writer, found herself doing when she splurged on Big Bud Press, which charges nearly $200 apiece for its trendy jumpsuits. Anything over $75 gets her thinking, “Why not just pay in segments?”
Reese told Morning Brew that since a major pay rise took effect, she’s confident she won’t be turning to Afterpay as often. She said before the pay rise she wasn’t racking up more debt than she could pay off, but conceded that “it’s getting really easy to justify yourself”.
She is currently trying to wean herself off the BNPL pathway. “I’ve been in situations where I’ve been like, ‘Wait, why do I have so much bullshit on Afterpay?’ And I’m stressed about it.
According to a November NerdWallet survey, 35% of BNPL users said they use these services as Reese did – “to spread costs over a longer period of time,” according to survey responses. NerdWallet pointed out that “some borrowers are not fully aware of the dangers of BNPL,” considering that 26% of survey respondents said they had tried BNPL to help them build their credit. (This survey predates any announcement that the credit bureaus expect more reports in this area in 2022 and beyond.)
There is also the fact that BNPL companies are likely to make money from late fees. Although Affirm says it has never collected late fees of any kind, late fees at Afterpay reached approximately $87 million in fiscal 2021, compared to $69 million in 2020. and $46 million in 2019.
Although plans for greater accountability of BNPL services are underway, there can be no assurance that the CFPB will take immediate action. March 1 is the deadline the CFPB has given companies to respond to specific questions it posed to understand how consumers are using these services: Do consumers use BNPL only for clothing and mattresses, or do they also use for pet care and insurance? The agency also wants to know the late fees and the number of buyers who actually pay their balance. Laura Udis, program manager at the CFPB, told Morning Brew that all the agency has promised so far is to release a report containing the findings of the investigation into the five BNPL operators.
Until then, it’s buyer beware.