The fintech industry has ballooned in recent years, with countless consumers benefitting from evolved digital banking solutions, improved security for payments, and an explosion of flexible payment options. But, as a rapidly evolving field with incredible financial potential, it’s unsurprising that regulatory advisors have been keeping a keen eye on developments in this space. Perhaps one of the most eagerly watched fintech sectors includes buy-now-pay-later transactions, or BNPL. While the BNPL movement has allowed thousands to manage their spending in new ways, many organisations have flagged BNPL as a potential fast-track toward debt and a haven for fraud. So much so, that the UK is considering increased regulation of the BNPL sector in an effort to safeguard consumers.  

That’s why when Klarna made headlines this week, many within the fintech and regulatory sector were unsurprised by the news. The flexible payments provider announced this week that it will report payments to UK credit agencies, Experian and TransUnion, from the 1st of June. This means that credit reference agencies, or “CRAs”, undertaking credit checks will be able to utilise Klarna transactions to make their decision.  

While Klarna insists this move is to help build credit scores while protecting consumers against debt, many have been left with questions. What does this mean for the BNPL sector? What prompted this announcement? And does this mean I need to pay off all of my Klarna purchases by June?

Fortunately for you, we’re fintech and regulatory fanatics and have long kept on an eye on unfolding events in the buy-now–pay-later sector. In this article, we explain what this means for you.  

Embedded payments and the buy-now-pay-later bonanza

New players are constantly bringing innovative solutions to the fintech market, with the ultimate aim of making payments an invisible part of the commercial journey. This has included Buy Now Pay later (BNPL), which has stolen the limelight from credit cards, loans, overdrafts and traditional point-of-sale financing. 2021 in particular saw a rising tide of BNPL providers, with Klarna taking centre stage as the dominant provider.  

While our Fintech Trends of 2021 report heralded advancements in this space, it also warned that 2022 would be the year that this trend would likely come under the watchful eye of the FCA. In a statement made earlier this year, the FCA announced a number of changes to the obligations of BNPL providers, including a change in consumer contract terms with the intent of making them fairer, easier for consumers to understand, and to better reflect how they use them in practice.  

These terms included:

• increased protection for consumers who opted to cancel a contract for purchases funded by a BNPL loan
• protection of a consumer’s rights when it came to firms terminating consumers’ accounts or access to services
• where a consumer is owed money by a firm, a right for the consumer to deduct that amount from payments due to that firm
• continous payment authority terms, designed to better educate consumers on how they could cancel their CPA.

These changes primarily targeted four big BNPL players: Clearpay, Klarna, Laybuy, and Openpay, who fully cooperated with the changes.  

Many believe Klarna’s announcement to be a response to mounting pressure from organisations, politicians, and regulators with the aim of protecting customers from financial debt. While it’s predicted that many consumers will jump ship from Klarna in response, others have applauded the steps taken to protect Klarna’s consumer base.  

In a statement taken from Klarna’s website, the firm states,

“Klarna will begin sharing the use of BNPL products with the UK credit reference agencies (CRAs) to help UK consumers build a positive credit history using Buy Now Pay Later, protect consumers from taking out unsustainable amounts of debt with multiple providers, and provide the financial industry with greater visibility of BNPL use.”

Does this mean I need to pay off all of my Klarna purchases on June 1st?

Before you race to pay off your outstanding balance, it’s worth noting that this move is intended to help UK consumers build a positive credit history using BNPL. Klarna states, “Consumers like yourself will no longer need to depend on using high interest and fee-charging credit cards to build a positive credit profile!”

Despite this, many have concerns over their credit rating and whether it will be immediately impacted. Reports indicate that debts and repayments will only start affecting customer credit scores after 18 months, meaning the changes will not have any formal impact until the end of 2023.

We asked Gareth Malna, our Head of FinReg, for comment but he was too busy hitting the “Pay Now” button on all his outstanding purchases.

What does this mean for BNPL?

BNPL has been a boon for alternative finance providers, with many traditional banks and credit providers suffering from decreased activity as consumers flocked to the easy-to-use apps. It’s possible that the pendulum will swing back towards the banks and credit card providers with this move, but the more likely scenario is that BNPL will continue to consolidate the consumer retail purchasing market, with consumers not really noticing the change. Some consumers who pay their debts late will, of course, suffer a reduced credit score and they are the ones likely to make their voices heard most loudly. To counter this BNPL providers could put in place greater protection mechanisms to ensure transactions get paid on time – and ultimately that can only be a good thing for consumers.

Our financial regulation lawyers sit at the epicentre of regulatory changes: allowing you to safely focus on the good stuff. Find out more about our finreg and fintech offerings.