The UK’s leading “buy now pay later” (BNPL) company has warned that it will take time to implement plans to regulate the sector despite this week’s government-backed call for urgent action.
Klarna was responding to the report from the Financial Conduct Authority the regulator, which said that the largely unregulated BNPL industry must be covered by its rules “as a matter of urgency”, because of a “significant potential for consumer harm”.
The review, by Christopher Woolard, a former interim chief executive of the FCA, was supported by the Treasury which said it would work “at pace” with the regulator to design the rules.
The FCA carried out its probe after the rapid expansion of BNPL during the pandemic prompted concerns about customers being tempted to spend more than they could afford.
BNPL companies, including Clearpay and LayBuy as well as Klarna, allow shoppers to buy goods instantly, with no affordability checks, and to spread payment over months.
The companies are paid by the retailers and customers pay no interest unless they miss payments. Then they face mounting penalties.
Although the Woolard report called for urgent action, there is no date set for regulation. But the companies involved indicated it could take time to create the necessary systems.
Klarna said credit reference agencies, which collate credit data from banks and other credit providers, “do not currently have the internal processes and infrastructure necessary for us to share data on our buy now pay later products”.
Klarna said it had progressed talks with the agencies and “the timeline for implementation will largely be driven by the agencies’ ability to update their systems and we are working with them to ensure this can happen quickly”.
Experian, a leading agency, said it welcomed more credit data sharing by the BNPL industry. “All lenders will have an improved view of what their customers can afford to repay so they can make the most appropriate lending decisions. We will continue to work closely with the sector.”
Klarna added that customers making on-time BNPL payments would contribute “dynamically” to their credit scores and help BNPL companies to ensure their services were available only to those who should be using them.
However, much depends on the detail, including the way the BNPL payment option is presented to customers. Today, many online retailers have responded to growing BNPL-financed sales by highlighting a BNPL payment option at the checkout. Some consumer groups have complained that this in itself encourages customers too much. Commenting on implementation plans, Klarna said: “We do not anticipate significant changes to the experience we currently offer.”
Precisely what redress customers who think they have been misled will have is also unclear. In the past, payday lenders have, for example, been forced to pay back interest incurred by customers who were lent money without undergoing affordability checks.
Meanwhile, BNPL customers wanting to prepare for regulation may need to gather identity and credit information about themselves, for example by registering on the electoral roll or arranging utility bills in their own names. According to a 2018 report from Experian, about 6m people in the UK are invisible to the financial system because credit agencies have little or no information about them.
Last year, 5m customers spent £2.7bn using BNPL, mostly online. According to the Woolard review, three-quarters are aged 18 to 36 and mostly buy fashion and footwear.
The report said that one bank found 10 per cent of customers using BNPL were already exceeding their overdraft limits. It would be relatively easy to accrue around £1,000 of debt that credit agencies and other lenders would not be able to see.
Resolver, the free online complaints service, recorded 8,577 complaints in the past 12 months about BNPL. Martyn James, its head of media, said that “issues to do with debt and financial difficulties were being passed to debt collectors too quickly and were still too high”.
The story has been amended since publication to include a comment from Experian.