In 2020 UK consumers reduced their collective credit card bill by £10bn, the largest annual reduction since records began. At the same time debit card usage increased sharply as consumers, locked down at home, adopted online shopping in huge numbers.
The shift to debit cards has been happening for many years across countries. Millennials, in particular, have shunned interest bearing credit cards and long term debt, in favour of debit cards for their day-to-day spending. Consumers want to use their own money in their bank account to pay but do require some flexibility to pay over time that doesn’t involve taking a loan or financial risk. About 50 per cent of millennials don’t even own a credit card.
When consumers need additional flexibility, or security, they increasingly choose to use buy now pay later (BNPL) services. These services are inherently lower risk to consumers than interest-bearing products such as traditional credit cards or bank overdrafts, given they are transparent, for a fixed amount tied to specific purchase and with a structured repayment schedule.
As these services have grown in popularity, more providers have entered the space, each with their own approach to payment schedules, interest, late fees, eligibility assessments, support for vulnerable consumers and protections if something goes wrong. This proliferation of choice is a good thing for consumers, but it brings with it confusion.
That’s why we believe the time is now right to extend the regulation of buy now, pay later, and Klarna has been fully engaged with the review conducted by the FCA, due to publish its recommendations in the near future. In particular, there are a number of key areas where regulation could bring additional protection to consumers when they are choosing how to pay.
The first is transparency. Consumers must be given the correct information to make informed choices about their finances. As with regulated financial products, key terms such as costs, interest rates, fees and repayment schedules must be presented clearly and in an understandable manner in the checkout. Individuals must be able to make the right choices between payment options – be that between traditional products and BNPL products or just as importantly between the different BNPL products themselves.
Once the consumer has chosen their preferred payment method, proportionate regulation must ensure that all providers of BNPL products perform appropriate eligibility assessments to further ensure that only those who should be using the services are able to do so.. Related to this, there is significant scope to improve the way Credit Reference Agencies’ (CRAs) services and scores are currently constructed. At present, the CRAs do not have the necessary internal processes and infrastructure in place for us to share data directly on our products dynamically, in a way which is proportionate to the low average value of a typical BNPL purchase.
Solving this for the industry as a whole is very much in the best interest of consumers. It will ensure that systematic checks are undertaken by all providers and, importantly enable consumers to demonstrate strong payment behaviour when using BNPL products. At Klarna, we are well-progressed in talks with the CRAs on this topic and are calling on them to move quickly here – just as regulation must be updated for the digital age, so must the infrastructure which supports that regulation.
Finally, there is now a growing need to review the resources and protections available to consumers when things don’t go to plan. Consumers should have access to an independent review of any complaints they feel were not satisfactorily resolved, as they do for regulated products. At Klarna we have established an internal Independent Complaints Adjudicator function to review complaints relating to our products where recourse to the Financial Ombudsman Service isn’t currently available. But we believe that consumers would benefit from having access to such a service regardless of which provider they choose.
Regulation has not kept pace with new products and changes in consumer behaviour and it is now essential that it is modernised and fit for purpose, reflecting both the digital nature of transactions and evolving preferences.
City A.M.’s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.