Buy now, pay later giant Klarna says it will start reporting
data on customers’ usage of its products to credit bureaus in the U.K., gearing
up for incoming regulations aimed at reining in the sector over fears it is
putting young people into debt.
Starting June 1, the Swedish fintech firm will share
information on whether Brits paid off an installment loan in time or are
falling behind on their payments to TransUnion and Experian, meaning such data
will now start to appear on their credit reports. Klarna has around 16 million
users in the country.
The move will apply to the firm’s “pay in three” and “pay in
30″ services, which allow customers to pay down their debt in three months or
30 days, respectively, without accruing interest. Klarna already reports data
on longer-term lending agreements ranging from six to 36 months, which do incur
interest.
Klarna said customers’ credit scores won’t immediately be
impacted by the change — currently, most BNPL services do not impact a person’s
credit score. However, after 12 to 18 months, a person’s usage of Klarna will
appear for lenders when approving a loan or mortgage application. Purchases
made before June 1 won’t be affected, Klarna said.
The development sets a major 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 lack of regulatory oversight. It could
deter shoppers from using the company’s services, as it will now affect their
credit history.
“Credit reporting is a double-edged sword in that it can be
used to punish borrowers but also to incentivise and reward healthy financial
habits,” Gwera Kiwana, product manager at U.K. fintech consultancy 11:FS, told
CNBC.
“Klarna reporting to credit scoring agencies could be
leveraged by thin file users such as immigrants and the underbanked as a tool
for credit building. That would strengthen BNPL’s offering versus high-cost
credit cards, if it could give customers the chance to improve their credit
score through good repayment behavior.”
BNPL companies face a reckoning in the U.K. and other
countries, as regulators look to crack down on such services amid worries they
are encouraging consumers — Gen Z and millennials, in particular — to spend
more than they can afford.
Last year, the British government announced it would
regulate BNPL products after a review found one in 10 customers of a major bank
using such services had already fallen into arrears. The rules are yet to be
approved, but are expected to come into effect by 2023.
In the U.S., meanwhile, the Consumer Financial Protection
Bureau is investigating Klarna, Affirm and other BNPL firms over concerns they
are pushing people into debt.
Klarna said that, while U.K. regulation was relevant to its
decision to report data to the big credit agencies, the company had been
working on the change for two years. The firm says it hopes its competitors
will follow suit.
“This will give other providers the ability to see whether
someone has overextended themselves using Klarna; or, equally, as other
providers come on board, we’ll be able to see whether consumers have
overextended themselves using those providers,” a Klarna spokesperson told
CNBC.
It’s not yet clear whether rival firms PayPal or Clearpay —
which is now owned by Square parent company Block — plan 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 shoppers with burdensome interest and late payment fees.
“It is alarming that U.K. consumers are still being forced
to take out high cost credit cards to demonstrate they can use credit
responsibly and build their credit profile,” Alex Marsh, Klarna’s U.K. boss,
said in a statement Wednesday.
“That will start to change on 1 June this year as the vast
majority of the 16 million U.K. consumers who make Klarna BNPL payments in full
and on time will be able to demonstrate their responsible use of credit to
other lenders.”
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