UK government takes aim at buy now, pay later firms like Klarna and Clearpay

• Installment lending firms will now be under regulatory oversight from the UK’s Financial Conduct Authority.
• This decision comes after the government agency found sufficient evidence of consumer risks involved with these services.
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The UK’s Financial Conduct Authority (FCA) will begin regulating buy now, pay later (BNPL) products, following a report that highlighted consumer risks involved with installment lending offerings.

Under FCA supervision, BNPL firms like Klarna and Clearpay (also referred to as Afterpay in the US and other markets) will be required to carry out eligibility checks on customers to review whether they can comfortably pay back loan amounts as well as protect vulnerable consumers from falling into debt. Although BNPL products offer an affordable way to fund transactions, the offering can pose financial risk to consumers-underscoring the need for regulations, according to John Glen, economic secretary to the Treasury.

BNPL offerings have gained mass popularity in the UK, especially during the recent holiday season-causing wary regulators to take action. At least 10 million UK consumers-or about 15% of the UK’s population-used a BNPL service to fund a purchase in 2020, according to a November 2020 study by Capco cited by Finextra. And that figure rose during the holiday season, with approximately 25% of UK consumers using a BNPL offering to fund a purchase, bringing in a whopping £2.3 billion ($2.9 billion) in volume.

But financial experts have flagged installment lending services as being potentially harmful for consumers: More than half of UK consumers ages 18 to 35 have missed a payment, and nearly two-thirds say that the offerings cause them to spend more than they intended to, per Capco data. In response to growing UK BNPL demand, members of Parliament introduced a bill to tighten regulations on the offerings, which was initially voted against-but the FCA’s recent findings have now brought forth regulations.

Regulatory oversight could negatively impact BNPL players like Klarna and Clearpay, and it might open doors to tighter restrictions abroad.

• There could be additional regulations on the horizon for BNPL players in the UK. Consumers are currently able to take out multiple BNPL plans under several providers, which could increase the likelihood of consumers falling into debt. FCA supervision might be the first step in setting up oversight of these services, but regulators may decide to introduce stricter restrictions, such as limiting the number of BNPL plans a consumer can be using as well enforcing tighter customer and eligibility vetting processes. Doing so could cut into volume potential for these providers, which can currently act freely.
• The tightening of BNPL regulations is welcoming news for credit card issuers. Bringing BNPL players under the FCA’s umbrella could help level out the playing field between credit cards and installment lending providers, which are often viewed as a credit card alternative: 39.4% of US consumers say they’ve used a BNPL product to avoid credit card interest, for example. Because installment lending offerings have grown in popularity globally-which has led to increased competition for credit card issuers, particularly in the US market-regulators may decide to implement BNPL restrictions elsewhere as well, which might limit BNPL players’ volume and draw customers back to credit cards.

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