Britain is cracking down on the $ 3.7 billion “purchase now, pay later” business

The logo of the Swedish payment provider Klarna will be shown on the display of a smartphone on April 22, 2020 in Berlin.

Thomas Trutschel | Photo library | Getty Images

LONDON – Popular “buy now, pay later” shopping services like Klarna will face stricter regulation on Tuesday, amid proposals from the UK government.

The Treasury Department said that buy now, pay later (BNPL) companies would come under the supervision of the Financial Conduct Authority (FCA), which regulates financial services companies and markets in the UK.

Such companies will have to do affordability checks before lending to customers, the government said, while people will also be allowed to refer complaints to the UK finance ombudsman.

BNPL products are used as an alternative to credit cards and are enjoying growing popularity during the coronavirus pandemic as people turned to online shopping due to lockdown restrictions.

With these services, popular by the Swedish start-up Klarna, customers can spread the cost of their purchases over a period of interest-free installments. Other companies in this area include the Australian company Afterpay, which operates the Clearpay brand in the UK, and Laybuy.

Consumer groups have warned that some people – especially younger people – could be lured into a debt trap. The consumer and product review company Which one? For example in the UK it is said that BNPL products could encourage people to spend more than they can afford.

A review by the FCA’s Christopher Woolard found the UK BNPL market to be worth £ 2.7 billion ($ 3.7 billion), with 5 million Britons using such products since the pandemic began. In the meantime, more than one in ten customers of a major bank using BNPL services was already behind schedule.

“Buy now, pay later can be a helpful way to manage your finances, but protecting consumers is important as these arrangements become increasingly popular,” Treasury Secretary John Glen said in a statement Tuesday.

“By intervening and regulating, we ensure that people are treated fairly and that only agreements are offered that they can afford – the same protection you would expect from other loans.”

Often times these days, BNPL is a teen’s first encounter with credit.

Alice Tapper

Financial fighter

Some opposition Labor Party lawmakers criticized the government for reversing BNPL controls. Labor’s Stella Creasy had led calls to regulate the BNPL, but the government only voted against a proposal three weeks ago.

Alice Tapper, a finance campaigner who has campaigned for BNPL sector regulation, said she was “thrilled” with Tuesday’s news.

“Currently, victims of fraud through BNPL products have not had the assistance of the financial ombudsman, and buyers 18 and over are being promoted to these products by non-risk influencers,” she said.

“Today, BNPL is often a teen’s first encounter with credit.”

“Regulation means consumers get the information and protection they deserve,” added Tapper. “The FCA and the government must act quickly to implement these recommendations.”

Klarna, which has raised a total of $ 2.1 billion in funding so far, welcomed the move towards regulation.

“As a fully licensed bank, Klarna works very comfortably in a regulated environment and wholeheartedly supports the regulation of the ‘buy now, pay later’ sector in the UK,” a Klarna spokesman told CNBC.

“We agree that regulation has not kept pace with new products and changes in consumer behavior. It is now important that regulation is modern, proportionate and fit for purpose, and reflects both the digital nature of transactions and evolving consumer preferences. “

Klarna is one of many tech companies that are expected to debut their stakes in the public markets over the next several years. The company was most recently privately valued at $ 10.6 billion. Afterpay has seen its shares rise more than 1,500% since the end of March and is currently valued at A $ 41.8 billion ($ 31.8 billion).

Damian Kassabgi, Executive Vice President of Public Policy, Afterpay Clearpay said, “We welcome today’s recommendations and look forward to working with the FCA, government and stakeholders to build on the consumer protection we are already creating the rules applicable to the sector.

“Clearpay has always believed that consumers are best served by products that have been developed with strict safeguards and appropriate industry regulations under the supervision of the FCA.”

Francesco Simoneschi, co-founder and CEO of the British fintech company Truelayer, called for “sensible” regulation to protect consumers, “but not at the expense of business model innovation”.

“It is clear that this is going to be a gigantic consumer experience and I would say that a little guidance from the regulator is welcome,” Simoneschi told CNBC on Tuesday.

“I hope that it is open enough not to create bureaucracy for innovation and to really focus on the risk point.”

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