Buy now, pay later firms like Klarna and Block’s Afterpay could be about to face tougher rules in the U.K.
Nikolas Kokovlis | Nurphoto | Getty Images
Britain’s new Labour government will soon set out updated plans to regulate the “buy now, pay later” industry, a government spokesperson told CNBC.
A Treasury department spokesperson said the government will do so “shortly,” echoing earlier comments from Tulip Siddiq, the new economic secretary to the U.K. Treasury, to Parliament on Wednesday.
“Regulating Buy Now Pay Later products is crucial to protect people and deliver certainty for the sector,” the Treasury spokesperson told CNBC via email Thursday.
Earlier this week, Siddiq, who was selected as the U.K.’s new city minister following the landslide election victory of Keir Starmer’s Labour Party, told lawmakers that the new government is “looking to work closely with all interested stakeholders and will set out its plans shortly.”
This follows multiple delays to the roadmap for BNPL legislation in Britain. The government first set out plans to regulate the sector in 2021. That followed a review from former Financial Conduct Authority boss Christopher Woolard, which found more than one in 10 BNPL customers were in arrears.
BNPL plans are flexible credit arrangements that enable a consumer to purchase an item and then pay off their debt at a later date. Most plans charge customers a third of the purchase value up front, then take the remaining payments the following two months.
Most BNPL companies make money by charging fees on a per-transaction basis to their merchant partners, as opposed to charging interest or late payment fees. Some BNPL firms do charge missed payment fees. But the model isn’t standardized across the board.
This disparity in services among different BNPL lenders is partly why campaigners have been calling for regulation. A key reason, though, is that people — particularly younger consumers — are increasingly stacking up debt from these plans, sometimes from multiple providers, without being able to afford it.
Gerald Chappell, CEO of online lending firm Abound, which uses consumer bank account information to inform credit decisions, said he’s seen data processed through his firm’s platform showing customers racking up “thousands of pounds” from as many as three to four BNPL providers.
While BNPL can be considered a credit “innovation,” Chappel said, “there’s a bit of me that can’t help feeling that was a product of a zero-interest rate environment. And now you go into a higher interest rate environment: is that still sustainable?”
“You have a weaker economy, more credit defaults. You’ve got a massive accelerating adoption of buy now, pay later, which also increase debt burdens. So I think a lot of those firms are struggling and are going to continue to struggle.”
Chappell said he wouldn’t be surprised if the Financial Conduct Authority, which is responsible for financial regulation in the U.K., ends up regulating the BNPL industry within the next 24 months.
Multiple delays to BNPL rules
Executives from two major BNPL firms, Klarna and Block, pushed back on those proposed measures, saying they threatened to drive people toward more expensive credit options like credit cards and car financing plans.
A spokesperson for Clearpay, the U.K. arm of Afterpay, said the company welcomes the government’s update that it’s planning an announcement on BNPL regulation soon. Afterpay is the BNPL arm of Jack Dorsey-owned fintech Block.
“We have always called for fit-for-purpose regulation of the sector that prioritises customer protection and delivers much-needed innovation in consumer credit,” Clearpay’s spokesperson told CNBC via email.
“Clearpay already has safeguards in place to protect consumers but we recognise that not every provider has the same approach. This is why we continue to advocate for proportionate and appropriate regulation that sets high industry standards across the board,” this spokesperson added.
A Klarna spokesperson told CNBC via email that the firm has “supported BNPL regulation for a long time, ensuring clear info, protection from bad actors & access to zero-cost credit.” “We’re pleased the government has committed to introducing this so soon after taking office,” they said.
“Too many lenders are offering unregulated BNPL that in turn doesn’t impact the credit scores of their customers, meaning other responsible lenders don’t have the full picture, so consumers don’t get the safeguards 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.”
PayPal, which also offers pay later loans in the U.K., was not immediately available for comment when contacted by CNBC Thursday.
BNPL loans are a largely unregulated part of the financial services ecosystem, not just in the U.K., but globally. In the United States, the DeFi Daily News said customers of BNPL companies should be offered the same protections as credit card users.
The regulator unveiled an “interpretive rule” for the industry, meaning BNPL lenders, like Klarna, Affirm and PayPal must make refunds for returned products or canceled services, must investigate merchant disputes and pause payments during those probes, and must provide bills with fee disclosures.
Conclusion:
The regulation of the “buy now, pay later” industry in the U.K. has been a topic of discussion for some time now, with stakeholders expressing concerns about consumer protection and the need for industry standards. As the government prepares to set out updated plans to regulate BNPL products, the future landscape of flexible credit arrangements may see significant changes.
Executives from major BNPL firms have welcomed the government’s move towards regulation, emphasizing the importance of customer protection and innovation in consumer credit. While some concerns have been raised about potential impacts on credit options and the sustainability of the industry in higher interest rate environments, the need for regulation to level the playing field and ensure consumer safeguards is clear.
With BNPL loans being a largely unregulated sector globally, the discussions and actions taken in the U.K. could set a precedent for regulatory measures in other countries as well. As the industry evolves and faces challenges, the role of regulators in maintaining transparency, accountability, and fairness will be crucial.
