Klarna to face tougher regulations as UK financial watchdog looks into buy now, pay later schemes

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Buy now, pay later (BPNL) firms such as Klarna are facing tougher regulations after the UK Financial Conduct Authority (FCA) called for more scrutiny.

The watchdog said the use of this type of unsecured lending nearly quadrupled in 2020 and is now at £2.7bn, with 5mln people accessing these services since the start of the pandemic.

Consumers turn to BPNL as an alternative to more expensive credit options but they risk to see borrowings piling up: UK households have nearly £250bn of outstanding consumer credit debt.

The FCA also called for more free debt advice services, the creation of a more sustainable credit market and a review of repeat lending.

The initiative comes amid an economic crisis caused by COVID-19, with huge numbers of UK residents losing their jobs or suffering financial hardship.

Between March and October last year, the number of adults with low financial resilience increased overall by 3.5mln to 14.2mln, according to the FCA.

Klarna, a fintech unicorn used by several online retailers to spread payments over up to two months, said it agrees that “regulation has not kept pace with new products and changes in consumer behaviour”.

“We welcome the outcome of the Woolard Review into change and innovation in the unsecured credit market,” it said in a statement.

“It is essential that regulation is modern, proportionate and fit for purpose, reflecting both the digital nature of transactions and evolving consumer preferences. Given the existing regulation in this area is nearly fifty years old, a comprehensive update to this entire framework reflecting consumers’ changing needs is in our view the right thing to do.”

Laith Khalaf, financial analyst at AJ Bell, noted that some people see BNPL as a simple payment technology, a little like Google Pay or Apple Pay, rather than a form of borrowing.

“Also of concern is the close relationship BNPL firms have with retailers, often receiving payments from vendors on the basis that their service will increase sales,” he commented.

“That leads to the potential for misaligned incentives, where the financial interest of BNPL providers lies in boosting sales with little regard for the consequences for consumers. Regulating BNPL will mitigate this risk, and firms that are behaving responsibly should have nothing to fear from oversight.”

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