Companies like Klarna and Block's Afterpay could face stricter rules in the UK – buy now, pay later
Nikolas Kokovlis | Only photo |
Britain's new Labour government will soon present updated plans to regulate the buy now, pay later industry, a government spokesman told CNBC.
A spokesman for the UK Treasury said the government would do so “shortly”, echoing earlier comments made by Tulip Siddiq, the new Economic Secretary at the Treasury, to Parliament on Wednesday.
“Regulating buy now pay later products is critical to protect people and provide certainty to the sector,” the Treasury spokesman told CNBC by email on Thursday.
Earlier this week, Siddiq, who was elected as the UK's new local affairs minister following Keir Starmer's landslide victory for Labour, told MPs that the new government “aims to work closely with all interested parties and will set out its plans shortly”.
This follows several delays to the roadmap for BNPL legislation in the UK, with the government first setting out plans to regulate the sector in 2021. Previously, former Financial Conduct Authority chief Christopher Woolard led a review that found more than one in ten BNPL customers were in arrears.
BNPL plans are flexible credit arrangements that allow a consumer to purchase an item and pay off the debt at a later date. Most plans charge customers a third of the purchase value up front, with the remaining payments made over the following two months.
Most BNPL companies make money by charging their merchant partners fees per transaction, rather than interest or late payment fees. Some BNPL companies charge fees for missed payments, but the model is not uniform.
These differences in benefits across BNPL lenders are one reason why campaigners are calling for regulation, but a key reason is that people – particularly younger consumers – are accumulating more and more debt from these plans, sometimes with multiple providers, without being able to afford them.
Gerald Chappell, CEO of online lending company Abound, which uses consumers' bank account information to make credit decisions, said he had seen data processed through his company's platform showing customers piling up “thousands of pounds” with up to three to four BNPL providers.
Although BNPL can be considered an “innovation” in the lending space, Chappel said, “part of me can't shake the feeling that it was a product of a zero-rate environment. And now that we're moving into a higher-rate environment, is that still sustainable?”
“The economy is weaker, there are more loan defaults. The trend to 'buy now, pay later' is increasing massively, which in turn increases the debt burden. So I think a lot of these companies are struggling and will continue to struggle.”
Chappell said he would not be surprised if the Financial Conduct Authority, which is responsible for financial regulation in the UK, regulated the BNPL industry within the next 24 months.
Several delays in BNPL rules
Executives at two major BNPL companies, Klarna and Block, opposed these proposed measures, saying they threatened to push people toward more expensive lending options such as credit cards and car finance.
A spokesperson for Clearpay, the UK arm of Afterpay, said the company welcomed the government's update that it plans to make an announcement on BNPL regulation shortly. Afterpay is the BNPL arm of the Jack Dorsey-run fintech company block.
“We have always called for targeted regulation of the sector that prioritizes customer protection and delivers much-needed innovation in the consumer credit space,” the Clearpay spokesperson told CNBC by email.
“Clearpay already has safeguards in place to protect consumers, but we recognise that not all providers take the same approach. That is why we remain committed to proportionate and appropriate regulation that sets high industry standards across the board,” the spokesperson added.
A spokesperson for Klarna told CNBC via email that the company has “long supported BNPL regulation, ensuring clear information, protection from fraudsters and access to free credit.” “We are pleased that the government has committed to introducing this so soon after taking office,” they said.
“Too many lenders are offering unregulated BNPL, which in turn has no impact on their customers’ creditworthiness, meaning other responsible lenders do not have full visibility and therefore consumers do not get the security they deserve,” said Philip Belamant, CEO of BNPL company Zilch. “It's time we level the playing field and remove this exemption. Regulation of this important sector is long overdue.”
PayPalwhich also offers pay-later loans in the UK, was not immediately available for comment when contacted by CNBC on Thursday.
BNPL lending is a largely unregulated part of the financial services ecosystem, not just in the UK but globally. In the US, the Consumer Financial Protection Bureau stated that customers of BNPL companies should be offered the same protections as credit card users.
The regulator has unveiled an “interpretive rule” for the industry that will require BNPL lenders such as Klarna, Affirm and PayPal to provide refunds for returned products or cancelled services, investigate merchant disputes and suspend payments during those investigations, and provide invoices detailing fees.