Earlier this month, Buy Now Pay Later (BNPL) giant Klarna announced it will start reporting its customer data to credit agencies, advising to them who pays on time and who falls behind on their debt.
Potential lenders will be able to see transactions and debts when checking consumers’ credit scores, with the move having the potential to both help and hinder its customers’ ability to successfully apply for things like loans and mortgages.
The move is a result of two years of talks with credit reference agencies Experian and TransUnion. Klarna will begin to report UK consumer purchases paid on time, late payments and unpaid purchases for Pay in 30 and Pay in 3 orders made on or after 1 June, 2022. This will likely have an effect on scores from 2023.
“It is alarming that UK consumers are still being forced to take out high-cost credit cards to demonstrate they can use credit responsibly and build their credit profile,” said Alex Marsh, Head of Klarna UK, “That 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.”
A positive move
Many in the industry see this as a positive step forward for the BNPL scene and have praised Klarna for the initiative.
One of the main criticisms of BNPL in comparison to credit cards has been the previous lack of reporting from payments companies. One of the best ways to build up a credit score is using and repaying small balances of credit, and now that Klarna is sharing its data with bureaus, it should help customers build credit in the long run – if using the service correctly and making payments on time.
On the other hand, it can also have negative effects on credit scores for consumers who don’t manage their payments correctly and get into debt. Having poor credit and debt can impact eligibility for products such as mortgages, car insurance, and bank loans, so consumers will have to use BNPL products responsibly to avoid this. Klarna have advised that all of its UK consumers will be made fully aware of the change in policy before it takes effect.
The industry view
Johnny Steele, Head of Banking, SAS UK & Ireland: “Using good quality, up-to-date data allows for better analytical insights and therefore better decision-making for banks and financial institutions.
“Klarna sharing the data of its 16 million customers in the UK will provide an even richer source of data for credit reference agencies to help banks and financial institutions to improve their risk profiling and governance. Without quality data, even the most powerful analytical tools won’t deliver reliable results.
“This is becoming more important than ever. In March alone UK consumers borrowed an extra £1.3billion in credit and of that £0.8billion was new lending on credit cards.
“Credit risk modelling is starting to look more like the evolving techniques for retail credit scoring, and now with BNPL data being incorporated into the dataset, these two worlds are getting closer than ever.
“The path forward for credit portfolio managers is one of continuous improvement in reducing risk and optimising the allocation of capital. This is one more step in this process of continuous improvement.”
The director of behavioural analytics at Neuro-ID, James Craddick, added: “As the BNPL space continues to mature and gain popularity, starting to report to the Credit Bureaus is another step that will further legitimise the product offering alongside other forms of credit.
“A primary component of the legitimacy comes not only from reporting on the repayment for that line of credit but more importantly the non-payment in the form of negative information on the credit report. This reporting will increase pressure on the consumer, as non-payment will now adversely affect their credit score and subsequent ability to access other financial products. Even with BNPL establishing popularity as a form of credit, representing 91 per cent of all consumer loans issued in 2020 in California alone, there is still high risk and uncertainty around the ability for consumers to pay back on BNPL products, especially with the minimal consequences.
“However, there are also many upsides for those looking to establish their creditworthiness through this more accessible credit product, particularly among the Gen Z crowd. Leveraging BNPL as a stepping stone can provide a cost-efficient way for consumers to build their credit scores and avoid high APRs and steeper penalties that come with traditional credit products and other forms of alternative lending.”
Sooner or later
“Klarna‘s announcement is nothing out of the blue,” said Kunal Sawhney, CEO, Kalkine Group.
“First, all the creditors, including commercial banks, must be feeling the heat of delinquencies, which were a direct fallout of the pandemic-induced slowdown and job losses. Credit scores help these creditors take a call on the loan application, and this matters more when the economy is not in its best shape. The US economy contracted in the first quarter, and the UK economy is also not in its best form. Slowdowns may hamper these economies’ ability to produce jobs and let wages rise. BNPL players might be filling the gap where the borrower wants to make an impulsive purchase.
“The point is that BNPL is a short-term credit, which usually does not come with interest levied on the borrowed amount. But why would a borrower want to avail of these short-term, short-ticket loans? One reason might be because they want to spend now and pay later when the bank account is credited with the wage. BNPL is on the rise, and various surveys suggest that an overwhelming number of consumers are availing of the services. Delinquencies would be a part of the system sooner or later. This might be why watchdogs in the UK and the US are favouring BNPL data’s inclusion in credit scores. This is a good thing — for all stakeholders, including the borrower, the lender, and the overall economy.
Lawrence Power, Global Head of Payments at Endava believes that “the Buy Now Pay Later (BNPL) industry continues to see great growth as more and more people turn to this flexible payment method.”
He continued: “While some consumer protection advocates have raised concerns over the potential for customers to increase their debt, this move from Klarna to work with credit agencies and report on the usage of services is a step in the right direction to further refining the financing option.
“This is particularly important in light of the UK Financial Conduct Authority suggesting that a lack of reporting could mean that lenders may find it hard to assess whether customers are able to afford their products. This announcement shows that the companies behind BNPL are listening and are prepared to take the right steps to safeguard the financial wellbeing of users, helping them make the best and wisest use of the system. This cooperation is an encouraging sign of a maturing market and is a good step for the industry as a whole.”
David Beard, Editor-in-Chief of Lendingexpert.co.uk, said on the announcement: “This is good news for customers who are responsible users of Klarna because it means they’ll be able to build their credit rating using the service, but bad news if you’ve ever used Klarna and haven’t paid what you owe them on time.
“It’s important you regularly check your credit rating. You can do this for free via numerous services and apps. Using Klarna can be a great way to build your credit rating if you haven’t applied for credit products before, but you must always pay what you owe on time.”