UPDATE 10pm UK: Klarna has shared its full response to the Woolard Review, agreeing that "regulation has not kept pace with new products and changes in consumer behaviour" and that it "fully support[s] modernising regulation and supervision" in the buy-now, pay-later sector. Klarna clarified that Xbox All Access includes an affordability check.
ORIGINAL STORY 5pm UK: Klarna, the Swedish financial company that handles the credit payment process for Xbox All Access packages in the UK, is facing government regulation of its buy-now, pay-later services following a report by the Financial Conduct Authority.
The Woolard Review - which was commissioned by the FCA to investigate BNPL credit agreements such as those offered by Klarna, Clearpay and PayPal - found that while BNPL products promise split payments with no interest, it would be "relatively easy" for a consumer to amass £1000 of debt by using multiple BNPL lenders.
"BNPL providers are looking to widen their scope from predominantly fashion and accessories, and are starting to partner with higher value retailers, including homewares and household electricals," the report said. "This could increase average transaction values and therefore outstanding balances."
The report found that most BNPL lenders carry out only basic credit assessments, such as soft credit searches or checking a customer's previous repayment history. But this only focuses on credit risk rather than whether the customer can afford the item, the report said. The FCA will now step in to regulate the sector, with BNPL lenders required to carry out proper affordability checks before lending money, and ensure customers are treated fairly should they struggle to repay the loans. Consumers using BNPL products will also be able to escalate complaints to the Financial Ombudsman Service. Legislation is due to be brought forward "as soon as parliamentary time allows", and the government will consult with stakeholders to ensure legislation is proportionate.
Klarna's Credit Agreement for Xbox All Access packages allows customers to obtain a console and Game Pass with no upfront cost, with payments split over a period of 24 months with zero interest. Missed payments, however, can result in late payment fees, paper statement fees, debt collection fees, and interest on these fees if they are not paid on time. Klarna may also hand the case over to a debt collection agency to recover any outstanding debt.
Klarna carries out an affordability check and "full credit search" on those applying for Xbox All Access packages, which can be seen on a customer's file and can affect whether other organisations choose to lend money to that customer. This became a major problem in September when consumers signed up for Xbox Series X/S packages, but had their orders declined due to stock shortages, with many left uncertain as to whether their credit scores had been impacted. Klarna eventually promised to work with credit agencies to ensure customers did not not receive marks on their files for declined orders.
BNPL schemes have become increasingly popular over the course of the pandemic, with the report estimating the total value of BNPL transactions at £2.7bn between January to December 2020. While this makes up around one per cent of the total credit market, this number has "accelerated very quickly and is still growing".