February 21, 2024


Alex Marsh, Klarna’s UK head, said the proposals would lead to longer application times and create “disproportionate friction” for consumers.

Daniel Harvey Gonzalez | Image via Getty Images

UK plans to regulate the buy now, pay later industry are “outdated” and will lead to worse consumer outcomes, executives from two industry giants have vowed to do everything in their power to ease proposed rules.

The bosses of Klarna and Block presented the proposals last week at an event hosted by UK fintech industry body Innovate Finance, saying the rules, while well-intentioned, could push people towards more expensive credit options such as credit cards and car financing schemes .

In a consultation paper published in February, the UK government proposed applying parts of existing legislation, known as the Consumer Credit Act, to implement buy now, pay later schemes. The currently unregulated buy now pay later model will be regulated by the Financial Conduct Authority.

The CCA requires a higher level of disclosure in the fine print of the loan agreement. BNPL said the requirement would cause “disproportionate friction” for those seeking short-term credit.

Buy now, pay later loans allow shoppers to defer payments for a month, or to spread the cost of their purchase over equal monthly installment periods. They’re attractive because people can easily apply for a loan, and they’re often interest-free — as long as you pay on time.

Alex Marsh, head of Klarna UK, told an Innovate panel that if someone is currently using Buy Now, Pay Later at an online checkout, they can expect to complete their purchase within a minute and a half , while using a credit card takes 30 seconds Financial World Summit. According to the Klarna model, this could increase to five minutes under new UK regulations, Marsh said.

Another disagreement among BNPL companies is that the current framework excludes certain companies from the scope of the law. For example, the government said the scope of regulation “should be limited to agreements provided by third-party lenders”, exempting merchants from providing short-term, interest-free credit directly to consumers rather than through third-party lenders.

Some companies may opt out of the UK market once costing is done. There is a risk of being overpriced. I think it’s a risk. It’s not like a red alert — it could be an amber alert.

adam jackson

Director of Public Policy for Innovative Finance

The government takes this view because it does not want individual traders and small businesses to be treated in the same way as large fintech companies. BNPL said this could create an unfair playing field.

“We know that there are some very large retailers and very large tech companies that have the ability to offer buy now, pay later services directly to their customers. We don’t think it makes sense to keep these out of regulation,” said payments firm Block Public. Policy International Director Michael Sadat said during the panel discussion.

Block, formerly known as Square, bought Australian BNPL company Afterpay (known as Clearpay in the UK) in 2020 for $29 billion.

Adam Jackson, head of public policy at Innovate Finance, told CNBC on the sidelines of the IFGS last week that some BNPL firms could exit the UK market if current rules continue.

Jackson said in an interview, “Once the costing is done, some companies may choose to withdraw from the UK market. There is a risk that operating in the UK will be too costly.”

“I think it’s a risk. It’s not like a red alert — it could be a yellow alert,” he added.

A Block spokesperson told CNBC: “The current proposal does not reflect the simple and transparent nature of BNPL’s offering and would create an unfair playing field.”

“The UK has an opportunity to play a leadership role in developing BNPL regulation that supports innovation, competition and good consumer outcomes,” the spokesperson added.

A HM Treasury spokesman said: “These products, when used correctly, can help consumers manage their finances, but we want to strike a balance that protects borrowers from falling into problem debt.”

“We propose a tailored approach to the information lenders need to provide to consumers so that the terms are clear and consistent without delay,” a Treasury spokesman added.

The Treasury Department began consultations on draft “buy now, pay later” legislation in February. The deadline for companies to submit their responses is April 11.

The popularity of BNPL during the pandemic has caused major companies to scramble to offer consumers their own services. Many big names in banking and tech, from Apple to Barclays, are now offering their own interest-free installment products.

This payment method is especially popular with young people. Consumer activists have tried to highlight the risks of BNPL to consumers, saying it encourages people to spend more than they can afford. They believe the industry desperately needs regulation.

As far as BNPL companies are concerned, they say they welcome regulation. Klarna has made several business adjustments in response to the upcoming regulation, including formal credit checks on customers.

It’s worth noting that any regulation is unlikely to come in for some time. The government is expected to review the consultation responses before finalizing the proposals. The rules then need to be voted on by UK lawmakers. Innovate Finance’s Jackson said he expected them to be in effect within 12 months.