The U.K.’s plan to regulate the buy now, pay later industry is “outdated” and will lead to worse consumer outcomes, executives at two of the industry’s giants said, vowing to fight tooth and nail to relax the proposed rules.
Bosses at Klarna and Block laid into the proposals at an event hosted by U.K. fintech industry body Innovate Finance last week, saying that the rules, while well-meaning, were likely to drive people toward more expensive credit options, such as credit cards and car financing plans.
In a consultation paper published in February, the U.K. government suggested applying parts of existing regulation – namely, the Consumer Credit Act – to buy now, pay later plans. The currently unregulated buy now, pay later model would be supervised by the Financial Conduct Authority.
The CCA calls for a much greater level of information disclosure in the fine print of lending agreements. BNPL firms say this requirement would lead to “disproportionate friction” for people seeking short-term forms of credit.
Buy now, pay later loans allow shoppers to defer payment by a month or to split the cost of their purchases over a period of equal monthly instalments. What makes them attractive is the ease with which someone can apply for a loan, and the fact that they are often interest-free – so long as you pay on time.
If someone currently uses buy now, pay later at an online checkout page, they can expect to complete the purchase in a minute and a half, versus 30 seconds for credit cards, Alex Marsh, Klarna’s head of U.K., said on a panel at Innovate Finance Global Summit. Based on Klarna modelling, that could increase to five minutes under the new U.K. rules, Marsh said.
Another disagreement BNPL firms have is that the present framework excludes certain firms from the scope of the laws. Merchants, for example, “would be exempt from FCA regulation (as credit brokers) where they offer newly regulated agreements as a payment option.”
Some firms might choose to withdraw from the U.K. market once they work through the costing. There is a risk of it being too expensive. I think it is a risk. It’s not like red alert – probably amber.Adam Jacksonhead of public policy, Innovate Finance
The government takes that view because it doesn’t want to subject individual traders and small businesses to the same treatment as large fintechs. BNPL firms say that risks creating an unlevel playing field.
“We know there are some very large retailers and very large tech businesses that have the capacity to offer buy now, pay later services to their customers directly. And we just don’t think it makes sense to exclude those from the scope of regulation,” Michael Saadat, international head of public policy at payments company Block, said on the panel.
Formerly known as Square, Block acquired Australian BNPL firm Afterpay — known as Clearpay in the U.K. — in a $29 billion deal in 2020.
Speaking on the sidelines of IFGS last week, Adam Jackson, head of public policy for Innovate Finance, told CNBC there was a risk that some BNPL firms would leave the U.K. market, if the current rules continue.
“Some firms might choose to withdraw from the U.K. market once they work through the costing. There is a risk of it being too expensive” to operate in the U.K., Jackson said in an interview.
“I think it is a risk. It’s not like red alert – probably amber,” he added.
“The current proposals do not reflect the simple and transparent nature of BNPL products, and will create an unlevel playing field,” a Block spokesperson told CNBC.
“The U.K. has an opportunity to take a leadership role in developing BNPL regulation that supports innovation, competition and good consumer outcomes,” the spokesperson added.
A spokesperson for the U.K. Treasury department was not immediately available for comment.
The Treasury opened its consultation on the draft of buy now, pay later legislation in February. The deadline for firms to submit their responses was April 11.
The prevalence of BNPL during the pandemic led to a rush among big companies to offer their own services for consumers. A host of big names in banking and tech — from Apple to Barclays — now offer their own interest-free installment products.
The payment method is particularly popular with younger people. Consumer rights 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 sector urgently needs regulation.
For their part, BNPL firms say that they would welcome regulation. Klarna made a number of changes to its business in anticipation of the looming regulation, including formal credit checks on clients.
It’s worth noting that any regulation is unlikely to arrive for some time yet. The government is expected to review consultation responses before finalizing the proposals. The rules then need to be voted by U.K. lawmakers. Innovate Finance’s Jackson said he expects they will come into effect within 12 months.