Klarna tightens credit checks in UK ahead of buy now, pay later rules

The Klarna logo is displayed on a smartphone.

Rafael Henrique | SOPA photos | LightRocket via Getty Images

Swedish fintech company Klarna said Monday it is introducing a number of changes to its products in the UK, as the country’s regulators prepare to tighten regulation over the fast-growing “buy now, pay later” industry.

One of the biggest updates Klarna is implementing is stronger credit checks; The company said a new feature will allow users to share income and spending data from their bank accounts to determine if they can afford future payments.

Unlike banks and credit card providers, Klarna does not conduct strict credit checks on its customers, which means that their credit score should not appear in their credit history.

Klarna said it will also launch the ability for users to pay for things at once, as well as clearer language at checkout to let users know they are taking a loan from the company and may be penalized for non-payment.

Klarna is one of the largest Buy Now, Pay Later or BNPL operators in the world. Such services allow shoppers to split their purchases into monthly installments, usually interest-free. In 2020, about $97 billion in global e-commerce transactions were processed through the BNPL platform.

Major companies have taken the leap into the market, including PayPal, Square, and Mastercard.

As BNPL companies tout their offerings as a fairer alternative to credit cards, critics worry that they may encourage people to spend more than they can afford. There are also concerns that users of these services may not realize that they are in debt.

The sector’s rapid growth during the coronavirus pandemic has prompted regulatory scrutiny in the UK. The British government is expected to issue an advisory on its plans later this month.

Sebastian Simyatkowski, chief executive of Klarna, admitted last month that the company “could have done a better job” in the UK by focusing on areas other than credit.

“We firmly believe that most of the time, people should pay with the money they have, but there are certain times when credit makes sense,” Simyatkovsky said in a statement Monday.

“The changes we’re announcing today mean consumers are in complete control of their payments whether they pay now or pay later.”

Klarna, a Swedish regulated bank, has raised a total of $3.7 billion in funding so far from investors including Japan’s SoftBank, China’s Ant Group and American rapper Snoop Dogg. The company was last valued at around $46 billion and is expected to go public in the next year or two.

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