Digital bank Monzo has launched its own buy-now-pay-later tool, entering the nascent credit market as rivals such as Klarna fall under greater regulatory scrutiny.
Companies such as Klarna and PayPal have recently dominated the market for credit upfront with payment on easy terms later with interest-free instalments for purchases over a number of months.
However, the UK’s Financial Conduct Authority and MPs voiced concerns about the sector’s provision of credit to potentially vulnerable customers without proper due diligence.
From 16 September, Monzo customers will be able to use its credit product Monzo Flex for all online and in-person purchases made via their Monzo account, eligible on purchases above £30 and up to £3,000.
Repayments can be made with zero interest or fees over three instalments over three months, or in a similar nature over six months and 12 months with a 19% APR charge. Monzo transactions can be turned into Flex repayments at any point up to two weeks after purchase.
The FCA and the Treasury said in February that providers would face new regulation after a government review found that it would be easy to accrue around £1,000 in debt that mainstream lenders and credit reference agencies cannot see. Lenders are now required to carry out affordability checks on customers and ensure the vulnerable are treated fairly.
“Flex combines Monzo’s technology and banking expertise with its core values, ensuring customers always have visibility and control over their financial lives and only borrow money that they can afford to repay,” said the bank’s head of borrowing Kunal Malani.
Monzo said its customers will receive a comprehensive credit and affordability assessment to decide any credit limit used with Flex. It will also report data to credit reference agencies, so other lenders will have visibility over customer usage of Flex. This means that unlike Klarna, using Flex with Monzo can affect credit reports.
Klarna was valued at $31bn earlier this year, making it one of the world’s most valuable private fintech companies as global usage of easy-access credit took off. Revolut is also said to be entering the market after its chief executive Nikolay Storonsky told the Evening Standard it was developing a similar product.
The new credit product could be a revenue earner for the loss-making Monzo if customers choose to use its six or 12-month instalment options.
In July the digital bank warned for the second consecutive year that there is “material uncertainty” over whether it can turn a profit in the future, as it revealed an FCA investigation into potential failures in Monzo’s anti-money laundering controls.
It raised more than £200m in funding for the business in the latest financial year, as the difficulties of the pandemic and changing regulatory requirements created a need for more capital. Monzo said at the time that it expects to see more losses in its future.
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