UK to regulate Buy Now Pay Later (BNPL) companies such as Klarna and Clearpay

LONDON – Popular “buy now, pay later” messaging services like Klarna will face tougher regulations on proposals announced by the UK government on Tuesday.

The Treasury said buy now, pay later (BNPL) companies would come under the supervision of the Financial Conduct Authority (FCA), which regulates financial services providers and markets in Britain.

Such companies will have to perform affordability checks before lending to customers, the government said, while people may also escalate complaints to the UK’s financial ombudsman.

BNPL products are used as an alternative to credit cards and have skyrocketed in popularity during the coronavirus pandemic as people turned to online shopping due to lockdown restrictions.

Popularized by the Swedish start-up Klarna, these services allow customers to spread the cost of their purchases over a period of interest-free installments. Other companies in the space include Afterpay from Australia, which operates the Clearpay brand in the UK, and Laybuy.

Consumer groups have warned that some people – especially younger people – could be lured into a debt trap. The consumer and product review company Which one? in the UK, for example, says it is concerned that BNPL products could encourage people to spend more than they can afford.

A review by the FCA’s Christopher Woolard found that the UK’s BNPL market is worth £ 2.7 billion ($ 3.7 billion), with 5 million Britons using such products since the start of the pandemic. Meanwhile, more than one in ten customers of a large bank using BNPL services was already in arrears.

“Buying now and paying later can be a useful way to manage your finances, but it’s important that consumers are protected as these deals become more popular,” John Glen, the Treasury’s economic secretary, said in a statement Tuesday.

“By intervening and regulating, we ensure that people are treated fairly and are only offered deals they can afford – the same protection you’d expect with other loans.”

Some lawmakers in the opposition Labor Party criticized the government for what they called a turnaround in BNPL controls. Labor’s Stella Creasy had sparked calls for regulation of the BNPL, but the government voted against a proposal to do so just three weeks ago.

Klarna, which has raised a total of $ 2.1 billion in funding so far, said it welcomed the move towards regulation.

“As a fully licensed bank, Klarna is very comfortable operating in a regulated environment and wholeheartedly supports the regulation of the ‘Buy now pay later’ sector in the UK,” a Klarna spokesperson told CNBC.

“We agree that regulation has not kept pace with new products and changes in consumer behavior, and it is now essential that regulation is modern, proportionate and fit for purpose and both the digital nature of transactions and reflects changing consumer preferences. “

Klarna is one of several technology companies expected to debut its shares in public markets in the coming years. The company was last privately valued at $ 10.6 billion. Afterpay, meanwhile, has seen its shares rise by over 1,500% since the end of March and is currently worth 41.8 billion Australian dollars ($ 31.8 billion).

“Clearly this is becoming a massive consumer experience, and I would say a little guidance from the regulator is welcome,” Francesco Simoneschi, co-founder and CEO of British fintech company Truelayer, told CNBC on Tuesday.

“I hope it will be open enough not to create a ‘bureaucratic hassle’ for innovation and really focus on the risk point with laser focus.”