Shawn, a 35-year-old IT specialist who lives in Ohio, first learned about Klarna while shopping for a climbing tower to keep Memes, his American Shorthair cat, entertained.
“It was at Petco,” he said, referring to a national chain of pet stores. “They had these little signs: ‘Split this into four payments.’” Klarna’s logo, rendered in bright pink, looked “friendly and hip.” Shawn signed up for the payment plan with his cellphone and bought a $100 cat tree for Memes. With Klarna, he only had to pay $25 up front and could split the rest up into two-week intervals. He had no reason to think that anything negative would come out of the decision.
Klarna, a Swedish lending technology firm, boasts 85 million users worldwide, making it one of the biggest companies in a burgeoning industry called “buy now, pay later,” or BNPL, which allows consumers to make purchases in interest-free installments. The payment plans boomed during the pandemic as lockdowns pushed millions toward online shopping. Originally associated with basic retail goods like clothes and cosmetics, buy now, pay later options are now touted as a way to pay for everything from college tuition to doctors’ visits.
But as the industry expands, consumer advocates warn that buy now, pay later services don’t yet have proper guardrails, leading to potentially dangerous consequences for those who use them — people who research suggests are among the most financially vulnerable consumers in America.
Simultaneously, the government’s attempts at creating even minimal rules for the buy now, pay later industry are facing vehement pushback from the industry — suggesting these companies don’t want to be regulated at all.
In 2019, the total amount of American customers’ buy now, pay later credit was $2 billion. In 2024, it’s on track to crack $80 billion. According to the industry research firm Adobe Analytics, American consumers will spend a record $18.5 billion via buy now, pay later plans this November and December holiday period alone.
In November, Klarna announced that it had filed to go public on the New York Stock Exchange. A successful public offering — experts estimate that the company will be valued between $15 and $20 billion when it goes public in 2025 — could continue to fuel the industry’s growth and in turn put more consumers at risk. Already, the option to use Klarna (or one of its many competitors like Affirm, Zip, Sezzle, Splitit, or Afterpay) is omnipresent online.
Adam Rust, the director of financial services at the Consumer Federation of America, a consumer advocacy network, said buy now, pay later “sounds like it’s light and easy. ‘I’m not going to pay any interest? Wow — this is what I’ve been waiting for.’ That’s the glitter.” The reality, he said, is “a little more worrisome.”
That reality has been diligently researched by the Consumer Financial Protection Bureau, the federal government’s consumer protection agency for financial products, which has uncovered increases in late fees, debt accumulation, and other potentials for consumer harm in buy now, pay later products over the last few years. In May 2024, the agency issued an interpretive rule stating that buy now, pay later companies are beholden to the same regulations as credit card companies, which means consumers have the right to dispute transactions and receive refunds for fraudulent charges.
Consumer advocates say that the rule — which went into effect in July — is a solid first step, but further regulation is needed to stop buy now, pay later customers from falling further into debt.
What will happen to the government’s consumer protections under the incoming Trump administration is unclear, although his boosters have already begun hammering the Consumer Financial Protection Bureau. Posting on X, formerly Twitter, in November, Elon Musk — the nominal head of the newly-formed Department of Government Efficiency — called to wholesale “delete” the consumer protection agency. Jeff Bezos, the Amazon founder, has said he’s “very optimistic” that Trump will pursue widespread regulatory rollback, adding, “If I can help him do that, I’m going to help him, because we do have too much regulation in this country.”
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Meanwhile, the Consumer Financial Protection Bureau’s interpretive rule is already under attack. Over the summer, a Republican lawmaker bankrolled by buy now, pay later investors introduced legislation to block the regulation, and the industry’s top lobbying group is both lobbying on the issue and trying to stop the rule via direct legal action.
After Petco, Shawn (who asked to only use his first name) started buying more and more items with Klarna: routers, video games, computer parts. In particularly lean times, he even paid his grocery bills through Klarna.
“I used it for several years,” Shawn said. “It was very convenient, and the fees were cheaper than my credit cards.” In total, he estimated, he had over $20,000 in debt on Klarna, all of which he managed to repay. “I had no issues with it,” he said — until a few months ago, when he switched cellphone carriers and, due to a technical glitch, was left unable to log in to his Klarna account to update his payment information.
Contacting Klarna support for help, he tried to speak to a human but found that Klarna support was all automated bots. Just this month, Klarna announced that due to its expansive use of Artificial Intelligence technology, it had stopped hiring people altogether a year ago.
While still struggling to log in to his account, Shawn learned that Klarna had sold his small debts, which collectively amounted to a few hundred dollars, to debt collectors. That was enough to sink his credit score: He said it went from the 700s to the 400s, a score that can make it difficult to get credit cards or auto loans.
“Now I’m constantly dealing with debt collectors who bought my Klarna debt that they shouldn’t even have in the first place,” Shawn said. “And my credit that I spent years building is destroyed. This stupidest little thing, this ‘split your payments up into four’ app [means] I can’t get a mortgage because it’s all tied to credit score. And nobody seems to care! Every lawyer I talk to says, ‘They’re unregulated — what are you gonna do?’”
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The Trillion-Dollar Question
The sales pitch from the buy now, pay later industry is straightforward: We are here to help you buy things you can’t otherwise afford with credit you can’t get elsewhere. And that’s true: Many buy now, pay later users are people who have little or no available credit and are being offered ways to go further into debt. In a 2023 report, the Consumer Financial Protection Bureau wrote that buy now, pay later users were more likely “to be highly indebted,” to “have delinquencies in traditional credit products,” and to exhibit “high levels of financial distress.”
Buy now, pay later providers like Klarna “win market share from credit-constrained consumers,” said Rust of the Consumer Federation of America. And there is no shortage of credit-constrained consumers in America. According to the New York Federal Reserve Bank, the nation’s collective credit card debt hit a record $1.17 trillion last month. As Rust put it, “If people are maxed out on their cards — and it appears the whole country is maxed out on its cards — it’s not surprising that the next resort is to jump to buy now, pay later.”
Buy now, pay later providers primarily make their money by charging vendors a percentage of every sales transaction, one that’s usually higher than the similar fees that credit card companies charge. (Vendors are willing to pay because, when offered buy now, pay later options, consumers tend to spend more). If these payment plans are paid back on time, there are no interest charges on most of the loans.
But buy now, pay later providers do charge late fees, some as high as 25 percent of the total of the loan. That means even if you’ve paid off the majority of your debt, if you’re late on your final payment, you could end up with a charge equal to what you have left to pay.
Responding to the Consumer Financial Protection Bureau’s interpretive rule, Klarna CEO Sebastian Siemiatkowski posted a Tweet full of indignation that the government agency would ever consider buy now, pay later companies and credit card operations analogous. He wrote that while credit card companies want you to carry debt, Klarna wants you to pay on time: “31 [percent] of Klarna’s customers paid their bills off early, 65 [percent] paid on time and only 4 [percent] incurred a late fee.”
But Klarna and other buy now, pay later companies don’t report the details of their loans to credit agencies, so the full extent of consumers’ debt is unknown. (Wells Fargo analyst Tim Quinlan calls it “phantom debt.”) According to a Bloomberg survey, “43 [percent] of those who owe money to BNPL services said they were behind on payments, while 28 [percent] said they were delinquent on other debt because of spending on the platforms.”
As the Consumer Financial Protection Bureau summed up clearly in a 2021 report, buy now, pay later companies are so slick and easy to use that “people can quickly become regular users of BNPL for everyday discretionary buying,” then go on to make “multiple purchases on multiple schedules with multiple companies.” Buy now, pay later providers also often require consumers to link their bank account directly to their buy now, pay later account for automatic payments, which can lead users into a spiral of insufficient funds and overdraft fees, which in turn are associated with higher rates of bank account closures and financial exclusion.
Newly established buy now, pay later startups benefit from coordinated advertising with legacy companies like Apple, granting the company a sheen of respectability. (One ad boasts that Klarna and Apple go together like “bacon and eggs.”)
The buy now, pay later industry continues to grow. Companies from Citi to American Express now offer some form of buy now, pay later services. It’s also expanding into new sectors like health care, where it’s known under the term “care now, pay later.”
Earlier this year, Reuters reported that Affirm, a major buy now, pay later lender that went public in 2021, has been aggressively recruiting medical providers, “hoping to tap growing consumer demand for financing for cosmetic treatments, dental services, medical devices, and veterinary procedures.” Affirm’s senior vice president of revenue told Reuters that Affirm is targeting medical procedures at a “price point” of $2,000 or more: “That suits our installment product… really well.”
Unlike most of its competitors, Affirm doesn’t charge late fees, but it does charge interest. While Affirm has pushed back on the interpretive rule regulating buy now, pay later companies under the same guidelines as credit cards, the company also says it takes certain steps backed by consumer advocates such as accurately assessing the ability of a consumer to repay any given loan. Affirm is also not represented by the Financial Technology Association, the lobbying group suing over the bureau’s interpretive rule. “We have long supported consistent industry standards and appropriate consumer protections for buy now, pay later,” an Affirm spokesperson said.
Walnut, another firm in the industry, originally launched to offer financing for medical costs only. According to Business Insider, its cofounder Roshan Patel started the company (which is now known as Arrow) “after a loved one was saddled with debt after being hit by a car.” Within the larger field of medical care, Patel launched Walnut to focus on people seeking behavioral health services. As Patel told Insider, “Many people, especially during COVID, have suffered from anxiety and depression. And a few hundred dollar therapy session every month is pretty expensive for most Americans.”
In a comment to regulators in support of regulating buy now, pay later plans like credit cards, the New York City Department of Consumer and Worker Protection flagged the expansion of the industry into health care. The agency’s commissioner, Vilda Vera Mayuga, said she had “grave concerns about the proliferation” of care now, pay later products “utilized by consumers in need of a variety of care, ranging from dental care to obesity and diabetes treatments to dermatological services.”
Mayuga urged the Consumer Financial Protection Bureau to extend the interpretive rule to explicitly protect consumers who use care now, pay later products. “These products are attractive to consumers for the same reason that buy now, pay later loans are, and the risks are the same,” she said.
Online and in surveys, users discuss the uglier truths of buy now, pay later loans, underlining the need for regulation. In one conversation on Reddit, a poster wrote, “Honestly BNPL is why I am in such a huge financial rut, they are addicting to use but man they are really hurting me financially.” When asked in a Consumer Federation of America survey to describe buy now, pay later plans, one respondent called it a “credit trap — it encourages more spending and over spending [sic] and can easily lead you into more debt than you need.” While many survey respondents praised its convenience, some warned the experience could turn negative quickly: Buy now, pay later is “a good way to finance large items,” the person said, “but you’re screwed if your life goes awry.” Another said, simply, it was “kind of a scam” that “kind of sucks.”
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Lara Ceccarelli, a certified credit counselor at the nonprofit debt counseling organization American Financial Solutions, said that over the last 12 to 18 months, there’s been an uptick in people contacting her organization seeking help for issues surrounding buy now, pay later services.
“Recently it’s become much more detrimental to people’s finances,” Ceccarelli said. “Most clients that have a buy now, pay later account don’t just have one [account]; typically, they’re stacking them on top of each other. It becomes really hard to track these accounts. [Buy now, pay later companies] don’t issue statements like credit cards.” If buy now, pay later companies start complying with the interpretive rule, they will have to issue statements that reflect the total amount of money a person owes. “Clients lose track of how many accounts they have and what the monthly payments are,” Ceccarelli added. “People who are using these are already dealing with a tight budget. And it can really flip a budget upside down quickly.”
One buy now, pay later user from central Florida — who asked to be identified by her initial, L. — told The Lever she first started using Klarna two years ago when she was 19, and that at first, her experiences were largely positive. She was moving at the time and incurring more expenses than usual, which Klarna helped her cover.
But then she started falling behind on payments and racking up debt and late fees. “It got too much, too fast,” L. said. “You always bite off more than you can chew. You’ll purchase something that makes sense at the time, but you’ll forget you’re paying off some other things.”
When L. first started using buy now, pay later companies like Klarna and Afterpay, she was working a part-time minimum-wage job as a barista while attending college. “If they had taken more than 30 seconds,” L. said, “they wouldn’t have approved me. They’re not good with seeing patterns of people who aren’t able to pay off their payments. But it’s in their best interest to keep giving you money and for you to keep messing up and coming back. They benefit off of people who aren’t smart with their money. I feel like that’s not what a company should be doing.”
Fighting The Regulators
The Consumer Financial Protection Bureau’s interpretive rule simply states that buy now, pay later companies are analogous to credit card companies, meaning their customers are entitled to protections “under long-standing laws and regulations already on the books.”
Namely, that means buy now, pay later companies must abide by the Truth In Lending Act, which requires lenders to resolve issues and disputes and offer refunds on services that are canceled and items that are returned. If correctly enforced, those protections could theoretically help consumers like Shawn address their technical problems, because the companies would be obligated to resolve disputes. As it stands now, Shawn is an example of a consumer lost within the quasi-regulated industry.
The interpretive rule is the most significant step taken so far to protect buy now, pay later consumers in the booming and largely unregulated sector. It’s “not overreach or a clamp down on innovation,” Rust said, but a simple reminder that “there’s no special exemptions for BNPL.”
But in August, Rep. Byron Donalds (R-Fla.) introduced legislation aimed at blocking the rule, calling it a “destructive” policy coming from an “out-of-control bureaucracy.” Donalds’ legislation also sought to stop the bureau from issuing any rules on buy now, pay later plans until an undetermined time when “a thorough and verified study is completed” on the industry, ignoring the fact that government regulators have been studying buy now, pay later plans for years.
Some of Donalds’ most prominent donors include investors in the buy now, pay later space. In the 2024 election cycle, Donalds’ campaign committee received over $16,500 from donors associated with the venture capital firm Andreessen Horowitz and $15,700 from donors associated with the investment bank Goldman Sachs, making them some of the top contributors to his campaign. Both Goldman Sachs and Andreessen Horowitz are heavily invested in various buy now, pay later companies. Andreessen Horowitz has been particularly bullish on the growth potential of buy now, pay later companies, specifically in health care, with one analyst for the company noting that “healthcare-specific buy-now-pay-later products” are a promising field, particularly as the “portion of healthcare spend covered directly by consumers has shot up in the last several years.”
Donalds’ office did not respond to a request for comment.
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In just the first three quarters of 2024, the Financial Technology Association — the lobbying group representing Klarna and other buy now, pay later providers — has spent $210,000 lobbying on financial technology. That includes lobbying on the legislation introduced by Donalds that would limit the interpretive rule, among other issues. Klarna itself spent $570,000 lobbying on issues including buy now, pay later plans and financial technology in the first three quarters of this year.
In October, the Financial Technology Association also filed a lawsuit against the bureau to stop the interpretive rule from taking effect. Its legal arguments in the suit are dry: It claims that the rule is invalid because the Consumer Financial Protection Bureau has overstepped its boundaries in creating law and therefore violated the Administrative Procedure Act. But the legal action itself is telling: The group is evidently willing and eager to fight even the mildest regulations.
When reached for comment, the Financial Technology Association directed The Lever to a public statement, which slams the bureau’s “rushed interpretive rule” for “creating confusion for consumers” and argues that the bureau is “seeking to fundamentally change the regulatory treatment” of buy now, pay later products “without adhering to required rule making procedures, in excess of its statutory authority, and in an unreasonable manner.” (A Klarna spokesperson clarified that while the Financial Technology Association does represent the company, Klarna itself is “not pursuing litigation.”)
“We’re a little surprised to even see the lawsuit,” said Lauren Saunders, associate director of consumer advocacy group the National Consumer Law Center. According to Saunders, the interpretive rule should not be “controversial. Any BNPL company that cannot operate with clear disclosures or consumer rights when people don’t get what they paid for or have unauthorized charges shouldn’t be in business.”
Buy now, pay later companies say they are “committed to strong consumer protections.” But their fight against the Consumer Financial Protection Bureau’s inchoate regulation appears to be rooted in something else: a desire to protect their business model.
“Once [buy now, pay later] companies are held accountable to the rules that apply to credit cards, they will by definition become subject to ongoing monitoring by the [Consumer Financial Protection Bureau] for compliance with the relevant regulations,” Rust explained. “They are pushing back because they want to remain in their silo, outside of the purview of the [bureau], but still in the same online checkout cart. They want to have it both ways, and the interpretive rule says they can’t have a free pass any longer.”
Consumer advocates like Saunders would like to see even more regulation to protect consumers, especially as the industry continues to expand. She said the interpretive rule does not address the fundamental issue of buy now, pay later lenders “making loans to people who don’t have the ability to take on that debt.”
Saunders also pointed out that Klarna is still adding new features, like a subscription model called Klarna Plus that costs consumers $7.99 a month in exchange for waiving certain fees. That’s another “hidden form of interest,” Saunders said. “And it also pushes people to borrow more.” (Marketplace, a public radio program on economics, has referred to Klarna Plus as a “subscription model for debt.”)
Researchers at Harvard have pointed out that the buy now, pay later field may continue to evolve in unexpected ways, suggesting one chilling possibility: The companies could put their extensive consumer data up for sale.
“As some BNPL products without any pathway to sustainable unit economics struggle to reach profitability, will BNPL companies use the payments history data and purchase history data they’ve collected on consumers to seek profit in objectionable ways,” wrote the researchers, “just as other tech companies have used consumer data in ways eventually found objectionable to the public?”
In their comments on the interpretive rule, Sens. Jack Reed (D-R.I.), Tammy Duckworth (D-Ill.), and Sherrod Brown (D-Ohio) — the outgoing Chair of the Senate Committee on Banking, Housing, and Urban Affairs — urged regulators to bring “the largest buy now, pay later lenders under federal supervision” to “better protect consumers from unfair, deceptive, and abusive acts and practices.”
Rust credits the Consumer Financial Protection Bureau’s director, Rohit Chopra, with being proactive about regulating not just buy now, pay later services but also a bevy of other emerging financial technology products.
“We’ve had a really great director,” Rust said. “He’s done a lot to address regulation on all these innovations. And I hope [the interpretive rule] is not reversed in the next administration. I just hope that doesn’t change.”
Trump has not announced his plans for the bureau, but it’s widely assumed that he will fire Chopra — and put in place a director who will roll back many of Chopra’s regulations. Ahead of that presumed regulatory rollback, the Republican leaders of the House Financial Services Committee have already told the bureau to preserve documents that “may potentially be responsive to a congressional inquiry” and to stop “finalizing partisan rule making.”
Klarna Goes For Billions
Klarna — Swedish for “clear” — presents itself as an upstart pushing positive change. It says it wants to be a “a fairer alternative to traditional credit cards.” Sebastian Siemiatkowski, its telegenic cofounder, regularly appears in Swedish media to discuss his hardscrabble childhood in a city called Uppsala.
In a profile of Siemiatkowski published on the website of the venture capital firm Sequoia Capital — a major Klarna investor — his wife Nina explains his creation of Klarna as an altruistic response to the hardships suffered by his own parents, who struggled financially. “He’s always craved the means to help his parents escape their own cycle of poverty,” she said, “and he ended up mapping this aim onto the millions of consumers who use Klarna to buy things they wouldn’t be able to otherwise.”
As the Financial Times has explained, Klarna’s success in its future public offering on the stock market is tied at least in part to Siemiatkowski’s ability to spin Klarna as a beneficent disrupter and to shake off the perception of the company as a “predatory business reliant on late fees to milk customers.” Klarna’s investors are hoping for a valuation upward of $20 billion. That would make Siemiatkowski, who holds 8 percent of the company, a billionaire.
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As Klarna moved toward its public offering, Shawn in Ohio was still fighting for the company to help him reverse his credit score implosion. He communicated with the office of the Ohio Attorney General, but staffers there haven’t been helpful and at times have been outright “hostile,” he said.
Shawn also contacted Sen. Sherrod Brown, whose office had previously helped Shawn with medical debts he wrongly incurred during the pandemic. But Brown, who lost his reelection campaign in November, is on his way out of office, and Shawn doubts his successor — Bernie Moreno, a Trump acolyte heavily boosted by the crypto industry — “gives a shit about nobody.”
As part of his crusade, Shawn contacted the Better Business Bureau, a nonprofit focused on advancing ethical business practices. He hired lawyers to send letters to Klarna’s legal department. And he kept contacting Klarna himself, his rage palpable in messages shared with The Lever: “You are a multibillion-dollar corporation. I should not have to fight your processes for basic account access.”
“I assumed, incorrectly, that these companies would be regulated kind of like a bank would be,” Shawn said. “This is supposed to be this big ginormous company. But very clearly, they’re not. I don’t understand how something like this is allowed to exist in the United States and not have some sort of resolution process. I spent my whole life trying to build up my credit score only for this stupid Klarna thing to destroy it.”
After The Lever reached out to Klarna for comment on this article, Shawn was contacted by a Klarna customer service representative. He said it was the first time he spoke to a human. The representative told him Klarna was refunding his debts and that they were “also in the process of removing any associated credit marks caused by this unfortunate situation.”
A Klarna spokesperson told The Lever that despite what may be indicated by Shawn’s experience, Klarna does have “a dedicated team of human customer service representatives who work in conjunction with our AI assistant.”
The spokesperson added, “This was an unfortunate event. Shawn’s order should not have gone into collections, but due to a technical issue — they did. We are looking to remedy this as quickly as possible and fix the problem. We know that we could have done and should have done much better here. We are taking a very close look at the issue Shawn faced and will fix it so it doesn’t happen again.”
As Shawn awaits the potential resolution of his issue, he remains wary of the buy now, pay later industry. As he said, “I tell my friends, ‘If you are going to use those services, realize that it could get really shitty real quickly.’”
For the most part, though, no one’s paying attention to his warnings. “Every single friend of mine,” he said, “has a crazy amount of buy now, pay later debt.”
