Buy now, pay later (BNPL) giant Klarna will start reporting data on customers’ usage of its products to credit bureaus in the UK.
It will begin sharing BNPL purchases made in the UK with the credit reference agencies (CRAs) Experian and TransUnion. The information on its 16 million British users will show if purchases were paid off as an installment loan in time or are falling behind on their payments.
“Until now, the UK’s credit reporting infrastructure was built with traditional credit in mind. Klarna has partnered closely with the CRAs in the UK over the past two years to help them update their systems to the point where they can now receive and process BNPL data in a fair and balanced way,” it explains on the Klarna website.
The changes include purchases users make on or after June 1 using Klarna Pay in 30, Pay in 3, in-app shopping, and Klarna Card.
The development sets a strong precedent for the BNPL sector, which has flourished due to streamlined application processes and minimal regulatory oversight.
However, those very reasons have led to much concern. The Financial Conduct Authority (FCA) expressed worry about this lack of visibility in its Woolard Review in February 2021. The review claimed it could be relatively easy to accumulate £1,000 worth of debt that mainstream lenders would not see. It also reported that providers tend to focus on risks to firms rather than whether customers can afford repayments.
The FCA does not regulate these firms but does review the terms and conditions of consumer contracts for fairness, and it is meant to ensure that the BNPL industry adopts high standards in its terms and conditions.
Klarna reported higher customer defaults for 2021 – rising from 0.56% of gross merchandise volumes in 2019 to 0.67% last year. In the same period, its net losses expanded by five times to $575 million last year, which CEO Sebastian Siemiatkowski put down to its expansion into new markets, as shown in its full-year results.
It is expected that the FCA’s powers in this area will grow due to the growing concerns over debt and high-risk users.
“Regulation is coming to BNPL products in the UK — the FCA has made this clear through its Woolard Review, actions under the Consumer Rights Act of 2015, and other statements. Part of any extension of the FCA’s regulatory perimeter is likely to include some ‘fairness’ or ability to pay requirement,” Jason Mikula, Managing Director at 312 Global Strategies BV, explains.
Looking at the broader impact of this, Alessandro Hatami, founder of Pacemakers and Council member at Inclusive Capitalism, points out, “BNPL will eventually be regulated as one — in fact; other countries will undoubtedly follow the same path. The sharing of data with the credit agencies is the first step by Klarna accepting this change.”
“Complying with future regulation is likely to necessitate BNPL firms like Klarna to use credit bureau and other data to understand if a borrower can afford the BNPL plan they’re taking out. Ensuring that assessment is accurate also requires BNPL providers to furnish data about their customers to the credit bureaus. While this information won’t impact consumers’ credit scores, that is likely because it will take some time to understand the value of repayment behavior on BNPL plans in predicting a borrower’s credit risk,” Mikula adds.
According to Ernest and Young, 48% of fintech adopters are willing to share their bank data with other organizations to receive better offers.
A further 46% of adopters stated they would be willing to share their data to get better deals from their service provider. Therefore fintech users will most likely expect a certain amount of data sharing.
Or, as Hatami puts it, “Credit sharing is a first step in the ‘normalization’ of BNPL as a credit product.”
“The fact that Klarna is sharing information with credit agencies has several implications for the firm and its customers. Klarna will increasingly be seen as a normal point-of-sale lender and eventually be regulated like one .”
Helen Femi Williams is a freelance journalist and podcaster interested in fintech, politics, economics, and their intersections.
She is the host of the letsgetlitical podcast, a fortnightly show interviewing guests from all different sides of the political spectrum, in partnership with the Mozilla Foundation.
Prior to this role, she worked as an innovation consultant developing insurtech and fintech products and ideas for brands, startups, and major corporations.
She studied International Relations at the University of Nottingham (UK and Malaysia).