Buy Now Pay Later Lending went off like a rocket in 2020, but 2021 has not been so kind. Nevertheless, regulators aim at the model; Mastercard, Visa, and Paypal all have viable options; and it seems that the fintechs all offer the same product.
Now, Klarna is planning some changes. According to the Klarna website this morning, “Klarna expands and strengthens UK offering including the launch of ‘Pay Now.’”
Consumers in the UK can pay immediately and in full wherever Klarna is available with ‘Pay Now.’
Part of a package of consumer-focused changes to drive up standards across the UK payments industry.
Even stronger credit and affordability checks, clear checkout language, simplified T&Cs, improved complaints handling, and removal of last remaining late fees.
From today, the company will now remove any remaining late fees from its regulated Financing product, which consumers use to spread the cost of higher value purchases over 6 – 36 months.
The first option, Pay Now, is a bit of a head-scratcher. You could have done this without Klarna in the first place.
Customers will now see a single Klarna button presented alongside other payment methods accepted by the retailer at online checkout. Consumers who select ‘Klarna’ will choose either to pay immediately using a debit or credit card or to pay in 30 days or over 3 installments with no fees or interest.
The BBC says the credit quality improvement seems a little wishy-washy, particularly when considering credit losses. According to company financials, credit losses surged from 1.2 million SEKk (Swedish Krona) to 1.8 million YOY for 1H2021, and red-ink on the net results nearly tripled to 1.4 million SEKk.
Buy now, pay later firm Klarna plans changes ahead of an expected Treasury crackdown on the UK market.
The company said it wanted to “drive up standards” in the sector by improving the way it operates and communicates and introducing the choice of paying for items in full immediately.
You’d think UK regulators would be more interested in moderate growth and better credit control. BBC thinks so also.
But such schemes have been widely criticized for encouraging shoppers to buy more than they can afford, with charities warning it can be a “slippery slope into debt.”
Critics say customers are bombarded with messages urging them to use buy now, pay later credit without a clear enough explanation of what it involves.
In particular, buy now, pay later firms have been accused of failing to explain that customers could be referred to debt collectors and that their credit scores could be affected if they miss payments.
Klarna is the largest buy now, pay later platform, but many other firms offer a similar service, including Clearpay, LayBuy, and Paypal.
Buy now, pay later services were used by five million people in the UK for total sales of £2.7bn in 2020. However, one in 10 people using them already had debt arrears elsewhere, a review by the Financial Conduct Authority found.
The review, led by Chris Woolard, found that three-quarters of buy now, pay later users were under the age of 36, and the vast majority of transactions related to clothing purchases.
Do not expect UK regulators to be impressed with Klarna’s announcement.
As BBC notes:
In February, the government announced that buy now, pay later products would be regulated by the Financial Conduct Authority (FCA).
The Treasury’s consultation on the sector is expected before the financial watchdog sets out its rules on regulation later.
We will have to see how rigorous UK regulators get. You can be sure that regulators might have been more impressed with a strategy to preempt delinquency with better underwriting rather than more explicit borrowing terms. But, unfortunately, that seems to be the cart before the horse.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group
