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Beware using Klarna's new 'pay now' service – you will lose vital Section 75 protection

Shoppers in the UK who use Klarna's new 'pay now' function will lose vital consumer protection that they'd get if they simply paid using a credit card instead. 

Klarna's new service, which is likely to be rapidly ubiquitous when shopping online, rolls out across the UK from today. It enables you to pay for items in full, immediately when using the card you have stored with Klarna.

It will be offered online everywhere Klarna is available by March 2022. It's a shake-up for the buy now, pay later (BNPL) firm ( been campaigning for regulation of BNPL), which until now only allowed users to delay payments or to split repayments into instalments.

But while you select 'Klarna' as your payment option on a retailer's website, the pay now payment will simply be taken from your linked credit or debit card. So while you may assume you'd get the same protection as if you paid using your cards directly, that's not correct for credit cards.

  • There's no Section 75 protection for linked credit cards. Klarna says this means you won't be covered by Section 75 of the Consumer Credit Act.

    Under Section 75, if you paid by credit card your card provider is jointly liable if you don't get the goods or services paid for and what you bought cost between £100 and £30,000. But the rules don't apply where a 'third-party payment processor', such as Klarna, breaks the direct link between a retailer and a credit card company.

    Similar can happen when paying on credit cards via PayPal, although there it's less clear-cut, sometimes you are eligible and sometimes not. 

  • You will be covered by chargeback for linked debit and credit cards though. There is a lesser, non-legal protection available on all cards called the chargeback customer service guarantee. This is a core part of the rules for Visa, Mastercard and American Express.

    Here, if you pay for goods and don't get them or have problems and the retailer won't help, you can start a chargeback to try to get your money back. This applies to all debit and credit cards, but with credit card transactions for items above £100 you would also normally be eligible for the stronger Section 75 protection.

Klarna also says all pay now purchases are covered by its buyer's protection scheme.

'If your aim is to simply pay on your card, then use more standard payment methods'

Commenting on the news from Klarna, founder Martin Lewis said: "I'm not sure I can see any reason why you'd use Klarna's 'pay now' service if you are using a credit card, especially for bigger purchases.

"While it may be a slightly quicker click than paying other ways, if your aim is to simply pay on your card, then use more standard payment methods where you will usually retain the greater protection of Section 75.

"This also means that if you have an issue with the card provider you have a right to go to the free independent Financial Ombudsman Service, something you don't currently have a right to do with Klarna."

You can't complain to the Financial Ombudsman Service about Klarna's pay now service

Those using Klarna's new pay now service – or its other short-term loan products – also can't complain to independent complaints arbitrator the Financial Ombudsman Service. This means your only option if you have a gripe – and you don't want to take it to court – is to complain via Klarna's website. It says it aims to resolve complaints within four weeks.

Over 15 million Brits have used Klarna since its 2014 launch, according to the firm. But today's move comes ahead of an industry crackdown on the BNPL sector following concerns from campaigners, including founder Martin Lewis, that such services need regulating at "maximum speed".

The Government announced earlier this year that all BNPL products will be regulated by the Financial Conduct Authority (FCA), although a date for this has yet to be set. In addition, the Treasury is currently consulting on the issue with its response expected before the FCA sets out its rules.

Once firms such as Klarna, Clearpay and Laybuy come under the FCA's jurisdiction, it means customers will be able to complain to the Financial Ombudsman Service if they are not happy with the service provided.

In addition, Klarna has today said it will perform more thorough checks on how much users can afford to borrow, and use clearer language during the checkout process to ensure customers understand they are taking on debt.

How Klarna works

You now have the three options when using Klarna to make short-term payments (it also has a separate longer term 'financing' option): 

  • Pay immediately using a debit or credit card linked to your Klarna account. This is the new option being rolled out from today.
  • Pay in 30 days. This is an existing option already offered by Klarna.
  • Pay over three instalments. Again, this is an existing option offered by Klarna.

Regardless of how you pay, Klarna doesn't charge interest or fees on the payment options listed above. It also doesn't charge late payment fees, although debts can be passed on to debt collection agencies and this may impact your credit score.

For more information on how BNPL works in general, and whether it's right for you, see our Buy now, pay later guide.

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