Buy now, pay later (BNPL) provider Klarna is to introduce capped late payment fees in the UK in line with other countries in which it operates, on the basis that “a total absence of late fees actually leads to less favourable outcomes for customers”.
Effective 16 March 2023, Klarna will charge a £5 fee for late payments after a seven-day “grace period” and sending a minimum of four “friendly reminders”.
Klarna said that each fee will be capped at 25% of the order value and there will be no more than two fees per order.
It has promised to use the fees collected to fund the new ‘Klarna Customer Recovery Programme’ to support customers in arrears.
Under the programme, Klarna will offer to waive 50% of the balance owed by customers who have fallen behind on their payments, instead of engaging a debt collection agency. Those same customers will be prevented from making additional purchases until they have made a payment for 50% of their overdue debt.
According to Klarna, in the Netherlands and Belgium where it already charges late fees, on-time payments have improved by 20%.
“Not charging fees feels customer-friendly, but we’re worried it drives the wrong behaviour and our data now shows that a total absence of late fees actually leads to less favourable outcomes for customers: with less reason to pay on time, customers are more likely to fall behind,” said Alex Marsh, head of Klarna UK.
However, having concluded that applying no fees to late payments is not in the best interest of its customers, Marsh added that “we don’t want to rely on fees or charge extortionate amounts like traditional banks who monetise the misery of customers who fall behind”.
“After all, if everyone paid their credit card bill on time, the card companies would go out of business,” he said.
Klarna has called on the Financial Conduct Authority (FCA) to consider limiting how much banks can earn from late fees, within the context of the new Consumer Duty.
The BNPL provider cited figures showing that UK banks and credit card providers earn £6 billion each year from interest charged to customers who have fallen behind on their payments.
One of the initiatives Klarna is launching in the UK to prevent customers from falling behind on payments in the first place is ‘Autopay’, which will take payments automatically from a customer’s account.
James Daley, managing director at research foundation Fairer Finance, added: “Used responsibly, late fees provide an important deterrent, as well as a reminder that buy now, pay later is a form of credit and needs to be taken seriously as a loan.”
Regulation of BNPL providers and products by the FCA is due to come into force in the UK this year, having first been talked about by the government in 2021.
Among the proposed legislation the government is inviting responses to is the creation of a temporary permissions regime.