Buy Now, Pay Later Giant Klarna says it will begin reporting data on customer usage of its products to credit bureaus in the UK, bracing for upcoming regulations aimed at curbing the industry over fears that is putting young people into debt.
As of June 1, the Swedish fintech firm will share information on whether the Brits have paid an installment loan on time or are late with their payments to Transunion Other experiential, which means that such data will now begin to appear on their credit reports. Klarna has around 16 million users in the country.
The move will apply to the company’s “pay in three” and “pay in 30” services, which allow customers to pay off debt in three months or 30 days, respectively, without accruing interest. Klarna already reports data on long-term loan agreements ranging from six to 36 months, which generate interest.
Klarna said customers’ credit scores will not immediately be affected by the change – currently, most BNPL services have no impact on a person’s credit score. However, after 12-18 months, a person’s use of Klarna will appear for lenders when they approve a loan or mortgage application. Purchases made before June 1 will not be affected, Klarna said.
The development sets an important precedent for the nascent buy now, pay later, or “BNPL” sector, which has flourished in no small part thanks to a smoother application process and a lack of regulatory oversight. It may dissuade buyers from using the company’s services, as it will now affect their credit history.
“Credit reporting is a double-edged sword as it can be used to punish borrowers but also to incentivize and reward healthy financial habits,” Gwera Kiwana, product manager at UK fintech consultancy 11, told CNBC: FS.
“Klarna’s reporting to credit rating agencies could be leveraged by thin file users such as immigrants and people with banking problems as a credit building tool. This would strengthen BNPL’s offering over high-cost credit cards. , if it could give customers the opportunity to improve their credit score thanks to good repayment behavior “.
BNPL companies face a showdown in the UK and other countries as regulators try to crack down on such services amid concerns that are encouraging consumers, especially Gen Z and millennials, to spend more than they can afford.
Last year, the UK government announced it would do so regulate BNPL products after a review found that one in 10 customers of a large bank using such services had already fallen into default. The rules have yet to be approved, but are expected to take effect by 2023.
In the United States, meanwhile, is the Consumer Financial Protection Bureau investigating Klarna, Affirm and other BNPL companies worries are driving people into debt.
Klarna said that while UK regulation was relevant to its decision to report data to large credit bureaus, the company had been working on the change for two years. The company says it hopes its competitors will follow suit.
“This will give other suppliers a chance to see if anyone has overstretched using Klarna; or, likewise, as other suppliers come on board, we will be able to see if consumers have overstretched using those suppliers.” a spokesperson for Klarna CNBC said.
It is still unclear whether the companies rival PayPal or Clearpay, which is now owned by parent company Square to block – plans to announce similar steps. The companies were not immediately available for comment when contacted by CNBC.
Klarna has often railed against the credit card industry for landing buyers with heavy interest and late payment fees.
“It is alarming that UK consumers are still being forced to withdraw high-cost credit cards to show they can use credit responsibly and build their credit profile,” said Alex Marsh, Klarna’s boss on Wednesday. United Kingdom.
“Things will start to change on 1 June this year as the vast majority of the 16 million UK consumers who make Klarna BNPL payments in full and on time will be able to demonstrate their responsible use of credit to other lenders.”