Buy Now Pay Later (BNPL) services have become increasingly popular among consumers who prefer to pay for their purchases in installments rather than upfront. However, Klarna, a key player in the BNPL industry, has announced that it will start reporting its customers’ purchases to credit agencies starting in June. This decision comes as regulators and government officials express concerns about the potential negative impact of BNPL on consumers’ financial wellbeing.

The move by Klarna means that the activities of its UK customers on the platform will now affect their credit scores. This is significant considering that credit agencies like Experian and TransUnion hold data on the credit scores of approximately 50 million adults in the UK.

The BNPL sector has faced scrutiny due to worries that its products can encourage consumers to overspend and end up with unaffordable debts. Although Klarna claims to not charge interest or hidden fees for late payments, consumer charity Citizens Advice has raised concerns about the possibility of users falling into debt. The charity reports that one in ten BNPL users has been referred to debt collectors, emphasizing the risks associated with these payment options.

Klarna’s decision to report purchases to credit agencies is intended to provide greater transparency within the industry. The company believes that by reporting timely payments, late payments, and unpaid purchases, it can demonstrate responsible use of credit to other lenders. Alex Marsh, Klarna’s UK head, has stated that this reporting should benefit the majority of their 16 million UK consumers who make BNPL payments in full and on time.

Being one of Europe’s most valuable fintech start-ups, Klarna has made significant changes to its UK business in preparation for potential regulatory changes. These changes include implementing a ‘pay now’ function, conducting stronger affordability checks, using clearer language during the checkout process, improving terms and conditions, enhancing the complaints process, and eliminating certain fees. The aim of these adjustments is to address concerns about the industry and ensure compliance with future regulations.

Sebastian Siemiatkowski, CEO of Klarna, has been vocal about the need for regulation in the BNPL industry. He believes that regulation will bring consistency, especially with traditional lenders entering the sector. Siemiatkowski has also hinted at plans to introduce new features that will make Klarna more similar to a traditional bank, further emphasizing the company’s dedication to responsible lending practices.

As BNPL continues to gain popularity, it is crucial to find a balance between providing convenience for consumers and safeguarding their financial wellbeing. Klarna’s decision to report purchases to credit agencies represents a significant development in the industry. The impact on consumers’ credit scores and the possible effect on further regulatory action in the BNPL sector remain uncertain. However, with increased scrutiny and oversight, the industry may undergo substantial changes to prioritize consumer protection and responsible lending practices.

Useful Links:
1. Experian
2. TransUnion