How does Klarna make money? What is the buy now pay later app and which shops are signed up to the service

Shoppers looking to spread the cost of online purchases can now access a new interest free payment app.

Buy now, pay later firm Klarna, which allows customers to delay payments for purchases, has launched a new app to cover all online retailers.

It had previously only been available to a select few retailers in the UK but has expanded its reach to include all traders with the launch of the new app.

Here's all you need to know about Klarna...

What is Klarna?

The Klarna app allows customers to purchase goods without having to make an initial payment.

Instead, shoppers have the choice of spreading out the cost of their purchases over three months or delaying payment for longer.

The items ordered will be shipped straight away, as usual, but the payment from the retailer won't be sought until a later date.

This way of shopping allows you to make purchases online and decide if you want to keep them or not before paying for them.

It means shoppers who use Klarna won't be waiting for their money back on items they decide they don't want to keep.

Klarna offers a Pay in 30 Days service - its most popular - which allows customers to delay their payment date by 30 days.

The firm performs a soft credit check to process this order which doesn't impact your credit score.

A Pay in 3 service splits the payment up over three months with the first instalment made at the time of purchase.

The third option involves a full credit check, which could have a negative impact on your score, and that is the finance plan.

Under this option the repayments are spread out over 6-36 months.

Klarna is an interest free delayed method of payment with no late fees.

Unlike credit cards, its interest free period doesn't have an expiration date and there are no additional charges if you make a late payment.

However, if you don't make the repayments within three months then debts are referred to a collection agency who will seek repayment.

Klarna makes its money through charging retailers a transaction fee each and every time a purchase is made on the retailers website.

In 2020, Klarna processed 20 million transactions, which it says allowed the firm to offer its service "completely free of charge".

For Klarna's longer term financing option, sometimes the customer has to pay a small interest charge.

Some retailers have signed up to Klarna such as ASOS, Gymshark, Schuh and River Island with others accessible through the new app.

The popular payment method and other interest free buy now pay later lenders are under the microscope of the Financial Conduct Authority (FCA).

The government wants to regulate the sector to avoid fears of younger shoppers amassing unaffordable debt repayments.

Firms, such as Klarna, will have to carry out affordability checks before lending, which the firm said it "wholeheartedly supports".