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Borrowed time

2 February 2021 By Karen Kwok

Britain is throwing sand in the wheel of the buy now pay later (BNPL) runaway train. The country’s financial watchdog wants companies that provide the new form of credit such as Swedish startup Klarna or Australia’s Afterpay to be regulated like ordinary lenders. That will mean more transparency, tougher checks, and slower growth.

Buy now pay later allows customers to spread out the cost of a purchase with seemingly no interest or fees unless they fail to pay back on time. The lender makes money by taking a cut on every transaction from the retailer. The technology has proven especially popular among young shoppers due to its speed and the lack of rigorous credit checks. During lockdown the volume of BNPL credit nearly quadrupled in the UK in 2020 to 2.7 billion pounds, the country’s Financial Conduct Authority reckons. Australia’s Afterpay, one of the largest-listed players, is now worth some $32 billion.

But easy credit also creates problems. There’s a risk that borrowers are lured into taking on more credit than they can afford. And, the lack of public data on arrears makes it hard for ordinary lenders to know how much debt their own customers have. The UK watchdog’s suggestion will likely mean that BNPL companies have to conduct stricter affordability checks, and report data to central credit agencies. Customers will also be allowed to complain to the country’s financial ombudsman.

Most importantly, the FCA is also suggesting that retailers may need its approval before they offer BNPL payment options to customers. That is likely to deter some companies from using the technology in the first place. Income from merchants accounted for some 80% of Klarna’s and Afterpay’s global income in 2020.

The net effect is likely to be lower profitability and slower growth. Yet the UK is still a relatively small part of the global market. Britain only accounted for 5% of Afterpay’s total group sales in the year to June 2020. Other countries, such as Sweden, Australia and the United States have hitherto taken a softer approach. That will be harder to justify now.


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