Writer: Lucy Lazarony
Editor: Lillian Guevara-Castro
Reviewer: Adam West
Key Takeaways
- Klarna, one of the biggest Buy Now, Pay Later providers, has been hit with a class action lawsuit.
- Klarna’s reach is wide with 118 million Klarna users worldwide, and 3.4 million transactions per day.
- If the Klarna lawsuit is successful, it could lead to additional lawsuits targeting BNPL providers.
A class action lawsuit has been filed against Klarna, one of the biggest Buy Now, Pay Later (BNPL) providers.
The lawsuit alleges that Klarna’s business model encourages overspending through its non-existent underwriting and its mandatory autopay. Klarna’s business practices are in violation of the Truth in Lending Act, Electronic Funds Transfer Act, and Illinois Consumer Fraud and Deceptive Business Practices Act, according to the lawsuit.
The Truth in Lending Act requires lenders that offer open-end credit to check a consumer’s ability to make payments before opening a credit account. A credit assessment is also required when a lender increases a consumer’s available credit. But the lawsuit asserts that Klarna does neither of these things.
According to the Electronic Fund Transfer Act, creditors may not condition an extension of credit based on a preauthorized electronic fund transfer. But the lawsuit argues that Klarna does just that by conditioning an extension of credit on a consumer’s agreement to pay by autopay.
Klarna’s Reach
Klarna is one of the biggest BNPL providers, with 118 million global Klarna users and 3.4 million Klarna transactions per day. On March 17, Klarna announced that it had surpassed 1 million merchants worldwide.
According to Klarna, consumers can choose to “Pay in 4,” making four payments without incurring interest. These payments are paid automatically every two weeks. Klarna users also may choose to make smaller payments over six months and up to 24 months. They also can pay in full for a purchase or pay for a purchase in 30 days.
Who shops with Klarna? According to the lawsuit, people using Klarna to make purchases are “disproportionately financially vulnerable” and are far more likely to have subprime credit scores or no credit scores at all.
Impact on Other BNPL Providers
Affirm and Block’s Afterpay are competing large BNPL providers. Other BNPL providers include PayPal Pay in 4, Zip, Sezzle, and Sunbit. If successful, will this class action lawsuit lead to other BNPL cases? Will it lead to more lawsuits against Klarna?
This is the second lawsuit against Klarna in the past few months. In December, Klarna was sued by a shareholder. The suit alleges investors took losses when Klarna’s stock decreased after an initial public offering in September, PaymentsDive reports.
The Bottom Line
Klarna, one of the top BNPL providers, is facing a class action lawsuit that accuses the company of violating the Truth in Lending Act and Electronic Fund Transfer Act in its business practices. According to the lawsuit, Klarna encourages its users to overspend with its lack of underwriting and its mandatory autopay.
At Klarna, consumers can choose to “Pay in 4,” making four payments without accruing interest. These payments are paid automatically every two weeks. To get “Pay in 4” financing, consumers must agree to enroll in autopay.
