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‘Buy now, pay later’ lender conduct examined

Author: ICAEW Insights

Published: 14 Jun 2022

Changing economic conditions, inflation and a cost-of-living squeeze has contributed to a slowdown in consumer spending and credit, drawing attention to the practices of ‘buy now, pay later’ lenders.

In May, Europe’s largest provider of buy now, pay later (BNPL) credit Klarna announced that it would share its customers spending data with credit reference agencies Experian and TransUnion and that the data would affect credit ratings from the end of 2023. 

Klarna said it would enable those who repaid in full and on time to improve their credit scores.

“The vast majority of the 16 million consumers who make Klarna BNPL payments in full and on time will be able to demonstrate their responsible use of credit to other lenders,” said Alex Marsh, head of Klarna UK.

While the decision has been broadly welcomed as a step in the direction to becoming a more responsible lender in the currently unregulated sector, it must be followed up with strong communication of the risks that a failure to repay holds.

“BNPL firms need to ensure they provide the right level of consumer support with clear communications so customers understand what the consequences of their borrowing could be,” Ruxandra Ioanitescu, payments expert at PA Consulting, told ICAEW Financial Services Faculty.

“This of course could be exacerbated by the cost-of-living crisis as more people may turn to various forms of lending and could potentially engage in more irresponsible financial behaviours.”

Pressure on consumers and lenders

The decision by Klarna to make its data available to credit reference agencies comes at a time when consumer spending on credit cards has risen from £1.3bn to £1.4bn in May, a rise of more than 11%, according to The Bank of England.

Economic observers noted that much of this could be explained by consumers using their credit cards to pay for everyday needs.

As an example of market slowdown, fast-fashion retailer Missguided, a major supplier of credit customers to Klarna, went into liquidation earlier this month, following steep losses as revenue dried up, and it was unable to pay suppliers. 

Klarna has made 560 redundancies, considering the changes it is seeing to demand for its services, which are often integrated into the online platforms of major retailers.

Debt circle

Inflation hit a 40-year peak of 9% on 18 May, driving a cost-of-living crisis that is squeezing household budgets. Citizens Advice recently published a report stating that 26% of credit card payments were going toward paying for BNPL debts.

Younger shoppers were most likely to borrow to pay off BNPL purchases, with 51% of 18- to 34-year-olds borrowing money to pay off BNPL debt, compared with 39% of 35- to 54-year-olds and 24% of over-55s.

Klarna’s decision is viewed as a pre-emptive move ahead of the BNPL sector being subjected to regulation once a consultation by HM Treasury has been completed.

A review into the sector carried out on behalf of the Financial Conduct Authority by its former CEO Christopher Woolard CBE, concluded that there was an “urgent need to regulate” and that it held “significant potential for consumer harm”.

Since that report was published, much has changed in the market, and both lenders and consumers – many of them younger lenders who took out credit agreements thinking it would not affect their credit history – have been squeezed considerably. Lender conduct will be under considerably more scrutiny than before.

You can read more from the Financial Services Faculty here: Buy more now, pay more later: is Klarna set to tighten its belt | ICAEW

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