Regulate now or worry about it later: Klarna has rewritten its own rules
Covid-19 accelerated the rocketship of Buy Now Pay Later schemes: over 10 million Brits used the service in 2020. This trend was growing before the pandemic though, with consumers drawn to a zero-interest product that saved them £76m in interest fees in 2020 that they would otherwise have paid on credit card interest.
Before, consumers were confined to the credit card industrial complex, with its clunky user experience and average 20 per cent APR. They now have an alternative. The allure is obvious.
But with popularity comes scrutiny; and with credit, which Buy Now Pay Later undoubtedly is, comes risks. Back in February the Woolard Review recommended the regulation of the sector. A consultation, promised for the Summer of 2021, is still not forthcoming, however. It’s in that context that we see Swedish Fintech darling Klarna announcing that it is overhauling its Buy Now, Pay Later product suite. Instead of waiting to be told to, Klarna is self-regulating.
Many of these changes are welcome. It is right that where credit is involved, the language on its payment channels should be explicit that Klarna is lending money. It is right that the consequences of missed payment be clear. It is also right that affordability tracking be rigorous, with innovative methods like open banking utilised to promote both credit worthiness and reveal liabilities spread across other providers.
But Klarna and other providers can’t, and shouldn’t, be left to do it alone, particularly as this consultation should offer an opportunity for more far-reaching questions to be asked about credit.
Buy Now Pay Later providers need to be regulated and there should be recommendations around consistency of language in complaints reporting. Additionally, much like retailers don’t need a license to accept credit cards, they shouldn’t need to register as a credit broker to offer these services: this would risk restricting alternative providers to the domain of the largest retailers. But more importantly, Buy Now Pay Later has laid bare the inadequacy of a legal framework for credit grounded in a time when Harold Wilson had just begun his second term in office, and it’s crucial that when the Government does act they think bigger.
Firstly, no two credit offerings are the same and the affordability tracking required should reflect this. Gone are the days of an opaque credit risk agency cartel controlling consumer access to credit – instead, innovations like open banking have democratised access. Customers must also have a clear avenue to redress, but the current construct of the Financial Ombudsman Service, with its £650 case fee, may not be the best proportionate solution. Especially seeing as the average BNPL transaction sits between £65-75. It’s about time we look to places like Australia, which has a more efficient ombudsman.
All this should be done urgently. In the meantime, while Klarna moves in the right direction, other less well-scrutinized Buy Now Pay Later providers may not take the actions required and consumers will fall through the gaps of ambiguity.
There’s a lesson in this for the Government. Companies being browbeaten into self-regulation by bad press is no way to regulate. As for the future of credit, hopefully Klarna’s changes are just a precursor to a bigger conversation. The UK’s 50 year old consumer credit infrastructure needs a refresh, and Buy Now Pay Later is a helpful lens through which this can begin in earnest.