A key e-commerce decision is which payment options to add to your site. There are hundreds of options available these days, which make it difficult for you to decide on one. The easiest way to come to a decision is to be clear what your priorities should be when deciding a payment method.
Here we look at the pros and cons of one such payment method, Klarna.
What Is Klarna and How Does It Work?
Klarna is actually a Swedish bank that also offers payment systems to physical and online stores. It has presence in 11 countries as of now, including the UK, the US, and Australia. In northern Europe, it has an e-commerce market share of 10%.
According to its website, the larger Klarna group has over 170,000 merchants and 2,500 employees, and it has over 5 million customers in the UK alone. Some of the popular merchants who use this payment option in the UK include Expedia, Missguided, H&M, Topshop, and Moss Bros.
Its payment method allows customers to pay for purchases in 3 deferred ways:
- Pay Later – Pay 14 to 30 days after purchase
- Slice It – Pay in equal instalments over 3 months to 3 years
- Pay in 3 – Pay in 3 equal instalments
In fact, the ‘Buy Now Pay Later’ phenomenon is closely associated with the company, and the phrase “Klarna It” has become common to refer to deferred payments, especially in its home country Sweden.
Let us look at how helpful this payment system would be to your business and your customers.
13 Ways Using Klarna Can Benefit Your Business
As a business, you need to look at revenue and sales as well as a satisfying customer experience to ensure returning buyers. Here are the advantages of integrating with Klarna:
- You get upfront full payments. While your customer gets the option to pay later, you will get paid immediately by Klarna. You don’t have to worry about getting delayed payments for your products.
- The onus of collecting money from the customer is not on you. The responsibility of reminding the customer of pending payments and ensuring they pay on time is on Klarna, not you. This means that you can enjoy customer retention and leave the back-end work to Klarna.
- You can choose which payment options to offer. Just because there are 3 variable payment choices doesn’t mean you have to offer them all. You can pick which options to offer, and you can even choose how many instalments to allow for a product.
- It is available for both online and offline purchases. You can set up Klarna for your transactions and enjoy its benefits whether you are an online store or a brick-and-mortar one.
- It is easy to set up. This service is available as a widget or plugin on popular e-commerce platforms such as Magento, Shopify, and SAP. This makes it easier for you to integrate it into your system and deploy. Updates are also automatically deployed and constantly optimised. You can also personalise Klarna’s user interface or experience to match your website’s.
- The ‘buy now, pay later’ system is gaining popularity. A UK consumer survey by RFi Group1 in 2018 revealed that more than one in four respondents have already used deferred payments for their purchases. This number is likely to continue increasing.
- If you have a fashion business, deferred payment options are likely to work well. According to a report in Fashion United2, fashion shoppers form a huge percentage of users of the buy now pay later option. The article quoted Klarna UK General Manager Luke Griffiths as saying that fashion customers like deferred payment because they can buy an attire in multiple sizes and keep just the one that fits, without having to worry about re-ordering and exchanging or depleting their bank accounts. “If they decide to return an item, they’re instantly able to shop again because they actually haven’t paid anything yet,” he said.
- You enjoy higher value per order. Since the customer can choose to pay for the purchased items later or in instalments, they are more likely to buy more items or items of higher value per checkout.
- More customers return to buy from you. Easy payment systems can help increase customer retention. A 2009 study commissioned by ClickandBuy3 found that 50% of users tend to cancel the purchase if the site doesn’t offer a payment method they like. Klarna’s own survey done in 2018 showed that 94% of customers would return to buy from a seller that allows them to pay later for their purchases.
- You get credit risk and fraud protection. Klarna offers purchase protection cover for both you and your customer, thereby making sure you don’t lose any money in a transaction.
- The transactions are secure. Being a bank, you can count on Klarna to have high security and encryptions in place for exchange of money and sensitive customer information. It also has a fraud alert service on transactions.
- It offers customer insights. You get important data about your customers that can help your business grow, such as what products people are buying and how many are choosing differential payment options.
- There will be constant back-end support. You can contact Klarna’s merchant support team via phone call and chat and get answers to several of your questions on its website itself.
5 Ways Klarna Benefits Your Customers
Customer experience with paying for their purchases should obviously be one of your top priorities when you choose a payment method. Here are the advantages to a customer when checking out through Klarna:
- It gives your customers flexibility. As mentioned above, customers can choose three different ways of deferring payments, thereby managing their cashflow better. This also reduces friction at the time of checkout, thereby helping to cut down cart abandonment issues for your business and increase conversion rates.
- Customers get full refund in case of return or cancellation. Once you confirm the customers’ cancellation or return, Klarna ensures that refunds are made on time. It also cancels future instalments set up on the item.
- Customers get regular payment reminders. Your customers do not have to remember the due dates to pay their instalments; Klarna notifies them regularly. The reminders are sent in a timely manner to make sure that they’re not missed.
- There are no hidden charges. Your customers don’t have to deal with interest charges or late payment fees for the Pay Later and Pay in 3 options. However, Slice It involves an interest rate of up to 18.9% per annum.
- It offers help to customers to deal with the inability to repay. In case your customer is unable to pay their instalment amount on time, Klarna’s executives help them find an alternative repayment solution and work with them to manage their money better. While this is not really your concern, it supports the customer well.
4 Things to Consider Before Choosing Klarna
Every product has its pros and cons, and this company is no different. We looked at customer and business reviews across the internet, and found the following points to keep in mind before selecting this payment network:
- The company is not fully regulated in the UK. The Financial Conduct Authority (FCA) is the official regulator for financial services firms and markets in the UK. Klarna’s status in the FCA registry is “EEA authorised”, which means that it is regulated in a European Economic Area country other than the UK, but it can offer certain products and services in the UK. However, any disputes against the company can still be raised with the Financial Ombudsman Service. Notably, Klarna is not registered under UK’s Money Laundering Regulations.
- A number of people have reported issues with its customer service department, which could get unwittingly associated with your business. On Trustpilot, Klarna has 7,153 reviews, of which 9% are ‘poor’ or ‘bad’, 2% are ‘average’, and 89% are ‘great’ or ‘excellent’.The common issues reported include:
- Refusals without adequate reason to process payments/make new purchases;
- Refusal of pay later options for big-ticket transactions;
- Delay in processing refunds for returns or cancellations;
- Lack of clarity on the onus of refunds between Klarna and merchants;
- Delay in answering emails to the service department;
- Confusion among customer service executives on the right resolution to problems.
A major problem here is that many customers tend to associate a payment network problem with the retailer, which means that any issue they face with Klarna could impact your business without any fault of yours.
- If not managed properly, the service could land customers, especially the younger ones, in large debts. Financial Times reported last year that the pay later option could be a potential debt trap for millennials4. A piece of noteworthy information here is that Klarna passes on the customer’s profile to a debt collection agency in case of failed repayment/s. Some customers admitted to The Guardian that they have started spending more5 since they started using the deferred payment network.
- Customers’ credit scores are not supposed to get affected by using Klarna, but there are caveats. The payment network does a soft credit check for Pay Later and Pay in 3 choices, which means that technically your customers’ credit scores will remain untouched. However, if the customer misses a payment on any of the deferred payment systems, then that gets registered on your credit file, and it can hit your score. This is illustrated by a recent BBC report about a student’s credit score having halved6 apparently because of repeated use of Klarna. Meanwhile, hard credit checks are done for the Slice It option, which will definitely affect customers’ credit scores.
Klarna’s USP is its deferred payment options, and that is definitely a great choice to give to your customers. The company has been criticised in the media for not disclosing all its terms and conditions openly, but this lack of information or clarity is expected to stop soon. The FCA just announced new rules for ‘Buy Now, Pay Later’ schemes7, applicable from 12 November 2019. The rules state:
- Backdated interest cannot be charged on repayments made by customers during a promotional offer period.
- Such companies have to declare both the advantages and disadvantages of the product to customers and make sure adequate information is given upfront.
- Regular notifications and alerts on when offer tenures end should be given to customers to ensure that they have enough time to repay the outstanding amount.
With this, deferred payment systems should become more customer-friendly, which extends your opportunities to get more benefits from their services. These payment options give your customers more flexibility; they reduce friction for the customer and cart abandonment issues at checkout for you, thereby increasing your revenue.
- RFI Group – Buy now or Pay later: The Trend gripping Millennials
- Fashion United – “Buy now, pay later”: pay-by-installment rises in fashion thanks to indebted millennials
- ClickandBuy – Survey finds that merchants are losing millions
- FT – Buy now, pay later — the new debt trap for millennials?
- The Guardian – Klarna: ‘buy now, pay later’ system that is seducing millennials
- BBC – Payment firm Klarna messed up my credit score, says student
- FCA announces new rules for ‘Buy Now, Pay Later’ schemes
Namitha Varma Rajesh