The UK regulates Purchase Now Pay Later (BNPL) corporations like Klarna and Clearpay

The logo of the Swedish payment provider Klarna will be shown on the display of a smartphone in Berlin on April 22, 2020.

Thomas Trutschel | Photo library | Getty Images

LONDON – Popular “buy now, pay later” shopping services like Klarna will be tightened on Tuesday, following UK government proposals.

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

Such companies will have to do affordability checks before lending to customers, the government said, while people will also be allowed to refer complaints to the UK finance ombudsman.

Used as an alternative to credit cards, BNPL products are growing in popularity during the coronavirus pandemic as people turned to online shopping due to lockdown restrictions.

With these services, popular by the Swedish start-up Klarna, customers can spread the cost of their purchases over a period of interest-free installments. Other companies in this area include the Australian company Afterpay, 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, it is said that BNPL products could encourage people to spend more than they can afford.

A review by the FCA’s Christopher Woolard found the UK BNPL market to be worth £ 2.7 billion ($ 3.7 billion), with 5 million Britons using such products since the pandemic began. In the meantime, more than every tenth customer of a major bank that used BNPL services was in debt.

“Buy-now-pay-later can be a helpful way to manage your finances, but it is important that consumers are protected as these agreements become increasingly popular,” said John Glen, Secretary of Commerce for the Treasury Department, in a statement Tuesday .

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

Some opposition Labor Party lawmakers have criticized the government for reversing BNPL controls. Labor’s Stella Creasy had led calls to regulate the BNPL, but the government only voted against a proposal three weeks ago.

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

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

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

Klarna is one of many technology companies expected to debut their stakes in the public markets over the next several years. The company was most recently privately valued at $ 10.6 billion. Afterpay has seen its shares surge more than 1,500% since the end of March and is currently valued at A $ 41.8 billion ($ 31.8 billion).

“It is clear that this is going to be a gigantic consumer experience and I would say a little guidance from the regulator is welcome,” Francesco Simoneschi, co-founder and CEO of UK fintech Truelayer, told CNBC on Tuesday.

“I hope that it is open enough not to create bureaucracy for innovation and to really focus on the risk point.”

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