UK Klarna users’ shopping will soon affect their credit score and experts believe other buy-now-pay-later (BNPL) companies’ customer could be about to have the same experience.

Swedish BNPL giant Klarna has announced plans to report how UK customers use its services to credit reference agencies, starting its reports to both Experian and TransUnion next month.

“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.”

Klarna has previously criticised credit card companies, accusing them of giving clients a raw deal to the point where some people fear them more “than death itself.”

While Klarna is framing the move as an opportunity to protect users and enabling them to comfortably build a credit score, the move comes after the BNPL sector has faced considerable criticism from consumer advocacy groups.

Organisations like Which? and Citizens Advice have cautioned that weak regulatory oversight put people’s financial wellbeing at risk. They have urged lawmakers to introduce stricter policing over the sector.

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Similarly, Christopher Woolard wrote in a Financial Conduct Authority (FCA) review in 2021 that the industry’s lack of affordability checks, clear information on product and credit agreements “represents a significant potential consumer harm.”

In response to the review, the UK Treasury launched a consultation into how the BNPL industry should be regulated last year and completed it in January. The government is now working to bring the sector in under the purview of the FCA.

“We are pleased to help protect our UK customers and continue to cement our leadership in responsible lending, now the credit reference agencies are in a position to accept our data,” Marsh said. “This was a key area of concern highlighted in the FCA’s Woolard Review and we very much took to heart the advice from Chris Woolard at the time to, ‘not wait for regulations before making changes.'”

Will more BNPL firms follow Klarna credit bid?

The BNPL sector exploded during the pandemic and is expected be worth $166bn by 2023, according to GlobalData’s thematic research. As it has grown, the calls to bring it under stricter scrutiny have grown louder. Therefore, fintech industry experts are left unsurprised that Klarna is making this move and predict that others will soon follow in its footsteps.

“Reporting to credit bureaus adds cost but the reduction in credit risk outweighs this,” David Ritter, financial services strategist at digital consultancy CI&T, tells Verdict. “Expect to see fewer BNPL firms not checking credit reports.”

Nilesh Vaidya, executive vice president at Capgemini Financial Services, agrees, saying that the announcement today is the culmination of “two-year discussion, which aims to better safeguard consumers’ finances and prevent further debt.”

“As such, we may soon find that other BNPL providers will have to start playing by the same rules as many traditional banks, which will greatly impact how this service evolves and what new offerings are created,” Vaidya continues.

However, not everyone is as optimistic about the announcement.

“We know that any debt can be stressful for customers who find that they can’t pay it,” Robert Schuijff, CEO at self-proclaimed ethical finance provider etika, tells Verdict. “This move will further impact those struggling by permanently blemishing their credit which will have a longer term impact.”

He adds: “That this news has come at a time when many UK households rely on alternative finance to meet their obligations as the cost of living crisis worsens is a major blow.”

Brad Goodall, CEO of payments firm Banked, told Verdict: “It’s going to be really important that customers know this up front when making a decision to use a BNPL product, as missing a payment by accident on a £40 purchase might not feel like a big thing, but a negative impact on your credit rating could have much more significant consequences in the long term – making it difficult to get life changing loans such as a mortgage.”

Klarna achieved a $46.5bn valuation last year on the back of a $639m funding round. The quadradecacorn is reportedly looking to raise new capital this year, with its CEO reportedly hinting that it might finally go public this year.

GlobalData is the parent company of Verdict and its sister publications.