It’s interesting that the UK regulator, the Financial Conduct Authority, came out with its review of the Buy Now, Pay Later (BNPL) economy, and the media started comparing Klarna with Wonga.
I’ve blogged in-depth about both in the past:
- Whatever you think, Wonga is doing well, July 2013
- The Finanser Interviews: Niklas Adalberth, Co-Founder, Deputy CEO and Board Member, Klarna, July 2015
But there is a fundamental difference between a firm that allows short-term loans at punitive interest rates and a company that allows you to stage payment for things you want to buy. The former was clearly causing issues of consumer protection; the latter is allowing the consumer options, in the same way as buying on a credit card. Isn’t a credit card buy now, pay later?
Now, the UK’s FCA has produced a review that precedes new regulations in this marketplace. Forget about the media view of the rules, here’s what the FCA actually said.
Innovations in the market can bring significant benefits, but also pose potential consumer harms that need to be addressed as soon as possible. In particular, the unregulated BNPL market more than trebled in size in 2020, poses potential harms to consumers and needs to be brought within regulation to both protect consumers and ensure it is sustainable.
The FCA said the use of BNPL agreements nearly quadrupled since the beginning of the coronavirus pandemic and is now £2.7 billion, with 5 million people using these products. In fact, it is estimated that £4 in every £100 currently spent in the UK uses BNPL. Of particular concern is that 1 in 10 of these customers slip into arrears: good for the BNPL firm; bad for the customer, the regulator believes.
As a result of the pandemic the demand for debt advice is likely to more than double. Ensuring strong provision of debt advice and debt solutions will be critical to a sustainable market in the long term and the recovery from Covid-19.
They recommend more funding to allow free debt advice services, as the UK recovers from the coronavirus crisis, as well as sustained support for people struggling to keep up with payments owing to the Covid fall-out.
They say a lot more, with other recommendations including:
- reform of regulation in the community lending and credit union sector, to offer alternatives to expensive short-term debt; and
- a review of repeat lending that could leave borrowers in difficulty.
All in all, it means that companies like Clearpay, Laybuy and industry leader Klarna will now be under the FCA’s regulation. This means that they will have to make affordability checks before lending, and ensure customers are treated fairly, in particular those who are vulnerable or struggling to repay the loans. Under FCA rules, people will also be able to complain to the Financial Ombudsman Service if things go wrong.
Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, TheFinanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal's Financial News. To learn more click here...