Sarah Drumm is a freelance journalist covering small businesses, start-ups, and new consumer brands. She is a contributor to Canvas8 and published a report on the popularity of direct-to-consumer brand communities for Thingtesting.

In February 2020, Lady Gaga didn’t celebrate Valentine’s, Galentine’s, or Palentine’s. Instead, she made a display of self-love, proposing to herself with a jewel-encrusted ‘Knight Finger’ ring – as part of a campaign by Swedish bank Klarna. 

 By associating itself with pop culture figures, challenger Klarna has been able to convince young shoppers that its service is anything but boring. In the UK alone, more than six million people have used Klarna to delay payment on clothing, beauty, and furniture purchases for up to 30 days, or split what they owe into instalments. 

 Each week, around 55,000 new customers sign up for the service. 

Klarna has emerged as the leader in the ballooning ‘buy now, pay later’ market, which 40% of Gen Yers and 34% of Gen Zers have participated in at least once. 

 In August 2019, it became Europe’s biggest fintech business, and after a £378 million round of funding it was valued at £4.5 billion. 

 The success of ‘buy now, pay later’ services like Klarna – and competitors Afterpay, Laybuy, and Clearpay – lies partly in the fact that being in debt is pretty normal for younger generations. While total household financial debts across the UK went up by 11% in the two years to March 2018 to hit £119 billion, a significant chunk (£32 billion) of this was made up by student loans. 

 Gen Zers, for instance, are each racking up an average of £36,000. 

 With wages stagnating and the cost of living going up, ‘buy now, pay later’ is a handy way for shoppers to ease their short-term financial burdens. 

But this type of credit is not risk-free, and can lead to unexpected problems in the future. In fact, a ComeparetheMarket.com survey finds that 22% of people have had their credit scores negatively impacted by ‘buy now, pay later’ products, while 41% report being unaware the loans could impact their credit score. [] As people feel the impact of the COVID-19 outbreak on their spending – be it boredom-fuelled purchases or a sudden need to delay payments to make ends meet, ‘buy now, pay later’ schemes are facing new pressure to take responsibility for their marketing and targeting – will Klarna and its competitors offer genuine help during a crisis, or add to anxieties? And looking ahead, as younger people start to contemplate more significant purchases, how will their current debt habits impact their access to credit?

Having grown up or come of age around the time of the 2008 financial crash, many young people are wary of banks and credit. According to the Edelman Trust Barometer, 56% of people worldwide believe that capitalism does more harm than good. 

 As trust in traditional banking institutions has waned, young people have been busy scrolling, swiping, and clicking on their phones. For those under 40, social media has become the default way to talk to brands, see what their friends are up to, and access information – all instantly.

This overload of immediate information has led to increased levels of spending among younger people. According to 

, Gen Yers and Zers collectively spend as much as £400 million per month purchasing items seen on social media platforms. 

 But some savvy marketers have also identified this trait as a way to get young people on board with a new type of financial provider – one that doesn’t talk, act, or look like a typical high street bank. The likes of Monzo, Revolut, and Starling have set up their services in a way that speaks to instant gratification junkies, providing a mobile-first service that gives real-time updates on their bank balances and breakdowns of their spending habits. According to digital banking solutions firm Crealogix, 25% of under-37s use a digital-only challenger bank. 

An opportunity to reframe the narrative around credit has also emerged. Klarna’s brand strategy is shaped to cater to younger generations in particular, says CMO David Sandström, using the question “What if we were a financial company that leads with emotion [and] pop culture?” to drive marketing. 

 This question not only influences Klarna’s look and feel, but its user experience, too. “It sits alongside other payment options as an equal,” says Rebecca O’Connor, a personal finance specialist at mutual insurer Royal London. “We know that for the Gen Zer and Yer groups, usability is really important. If it’s slick and it looks right, then it gets a thumbs up [from them].” 

Gen Zers are looking for brands to help with financial literacy

Debt has become a normal part of life for Gen Yers and Zers, O’Connor says. “We’ve been forced into accepting debt as a normal reality, and that’s come about as a result of student loans and [getting used to] having something that you’re paying back monthly out of your salary.” 

 Many under-30s are also finding what’s left of their wages isn’t going very far. A 2019 study found that Aberdeen and Derby were the only UK cities where less than 30% of monthly income is spent on rent, while people living in more expensive cities could be approaching ‘debt levels’ on a monthly basis. 

Young people are taking out more loans just to keep up. According to SpareRoom, 31% of Gen Yer renters go into debt to attend their friends’ weddings, while a survey by CreditKarma found that 39% of Gen Yers end up spending money they don’t have when socialising. 

 “We don’t think of it as debt. We think of it as spreading payments,” says O’Connor. Klarna’s website even explains its services as “an alternative to credit” – a confusing descriptor for young customers who may not be financially savvy enough to fully understand what they are getting into. 

 Indeed, it’s a precarious situation, with many finding they can’t keep up with these additional squeezes. In fact, 30,000 people have damaged their credit score because of missed Klarna payments. 

Far from removing the shame and stigma around debt, the perception of ‘buy now, pay later’ has created a situation where young people are racking up huge levels of debts without really realising. Almost a quarter of 18- to 24-year-olds say that technology has created a ‘buy it now’ culture that makes it difficult to track spending, while 14% worry they are addicted to spending money. 

 Rachel Duffey, CEO of debt advice company PayPlan, says 70% of under-34s that use the firm’s services have taken out a ‘buy now, pay later’ loan, “which is disproportionate to any other trends we've seen within that age group or within any other age group.” 

 Most concerningly, there has been a significant rise in the number of bankruptcies among young people. Under-25s made up 6.5% of all personal insolvencies as of 2019, up from 1% in 2016. 

 This uptick is even more pronounced among women, with insolvencies among women aged 18 to 24 rising almost a quarter from 3,175 in 2017 to 3,930 in 2018. 

76% of Gen Zers wish secondary school taught them about money

Could these insolvencies have been prevented if young people had a better understanding of – and felt more comfortable talking about – their debt struggles? Compounding shame creates confusion when they interact with financial products – 80% of Gen Yers who have gone into debt have kept it a secret from their friends. 

 And according to investment app Moneybox, 34% of Gen Yers feel anxious about financial planning, with 39% saying they’re unsure about it. The Moneybox survey also highlighted a lack of financial literacy, with 38% saying they didn’t know what an ISA is, and half reporting they don’t understand the benefits of investing versus holding on to cash. 

When they do end up in difficulty, “people just feel embarrassed that they’ve got it so wrong,” says Duffey. “It’s as simple as that.” 

 O’Connor agrees, adding that young people looking for a quick financial fix aren’t necessarily going to be interrogating the solutions on offer thoroughly. “For some people, their first interaction with interest-free credit is [when buying] some trainers. They wouldn’t think: ‘Oh, I need some financial education before I do this’,” she says. 

 The appetite for that education is there, though, with 76% of Gen Zers saying secondary schools should offer classes on financial management. 

In response, ‘buy now, pay later’ firms are working to do more to help their customers manage their money. Klarna has started posting articles to its blog using the tag ‘Mindful Money’, covering topics such as 

 Laybuy, a New Zealand-based ‘buy now, pay later’ company that offers its service in the UK, also has a section on its website called 

, which provides budgeting tips and information on where to get free financial advice.

While pay-over-time can be a useful budgeting tool if used carefully, people need better education on the potential impacts to their credit. “The typical difference in interest payments between somebody with a perfect credit score and somebody with a fair or good credit score can be [as much as] 10%,” says O’Connor. 

 Research from TDX group finds that 26% of Britons don’t know how insolvency would impact their ability to open a bank account, while 19% don’t think it would affect their ability to get a mortgage. 

 Some financial firms are reaching out to younger customers to help develop healthier financial literacy. Following the footsteps of Spotify’s successful ‘Wrapped’ campaign – which let listeners see which songs and artists they’d been listening to throughout 2019 – in January 2020, Monzo gave its users a ‘Year in Review’, showing where they had spent their money during 2019. 

 First Direct has also launched a financial wellness campaign, #MoneyWellness – its adverts, which feature slogans like ‘There’s no right way to money’, are designed to encourage customers to engage without shame or fear. 

Klarna has been successful in its mission to change perceptions of short-term debt, and the company’s branding power – combined with its ease of use – has proved to be a hit among under-30s. But the bank is coming under fire for inserting itself into the cultural zeitgeist, accused of encouraging users to accrue debt. In its pitch to retailers, Klarna says its service can help to increase average order values by 16% and the frequency of purchases by 20%. 

 As such, it has become an important tool for brands looking to up consumer spending. 

 While the company has grown significantly since its 2005 launch, brands looking to repackage debt risk may lose customer confidence if Klarna’s service starts to be perceived as dangerous for shoppers and encouraging reckless spending. 

 In Australia, the government is considering reclassifying ‘buy now, pay later’ loans to tighten regulations – causing publicly-listed competitor Afterpay’s shares to fall 20% in the wake of the news. 

 finds that some high-street retailers have been increasing their profits by offering expensive credit, with stores giving discounts or free credit to those paying via a ‘buy now, pay later’ scheme. 

 And an investigation by Refinery29 reveals that ‘buy now, pay later’ customers risk having their debts sold to collections agencies, despite no mention of this being made on the provider’s website. 

 “There is a difference between spreading the cost and just deferring it. I’m not saying it’s a bad product. We have a very high bar for new [credit] products and we’re struggling with ‘buy now, pay later’,” says Simon Wolfson, CEO of clothing retailer Next. 

 O’Connor says that retailers should assume some of the responsibility, “because they are the ones who are seeing this boost in sales” – retailers that explicitly detail the risks could boost trust. 

 In a move to make the relationship between shopping and debt more transparent, the FCA has introduced rules requiring businesses to inform customers of potential interest fees on ‘buy now, pay later’ products. 

'Questions for Klarna as study warns “pay later” schemes damaging millions of shoppers’ credit scores'

 of Gen Zers have used the services of a ‘buy now, pay later’ company at least once 

 have damaged their credit scores because of missed Klarna payments, due to being unable to keep up with repayments 

 of Gen Yers end up spending money they don’t have when socialising 

Gen Yers and Zers are turning to quick credit providers like Klarna to make everyday purchases, even though their finances are already stretched

Unlike more traditional forms of credit, Klarna is seen as complementary to Gen Yer and Zer lifestyles – providing easier access to beloved brands and products

Many young shoppers don’t understand the risks that come with taking out credit

Rebecca O’Connor is a personal finance specialist at Royal London, the UK’s largest mutual insurer. As well as working with Royal London, in 2015, O’Connor founded Good With Money, an ethical personal finance blog.

Rachel Duffey is the CEO of PayPlan, a company that provides free debt advice and debt-management plans to help those struggling with their finances. Since it was founded in 1992, the firm has worked with over a million customers.

Gen Y (born 1982-1996)

Gen Z (born 1997-2010)

Eastern Europe

United Kingdom

Money

Banking and payments

Insurance

Education

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Interview with Rebecca O’Connor conducted by the author

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Gen Yers and Zers are turning to payment services like Klarna, Afterpay, and Laybuy to help their wallets keep up with their shopping habits. But due to a lack of education regarding financial responsibility, how are these ‘buy now, pay later’ services impacting their financial futures?

2020 Expert Outlook on Money

How are Gen Zers managing their money?

Klarna: buy now and pay later for online shoppers

Monzo demystifies credit scores for confused Britons