IFGS 2023: UK has the opportunity to take the lead on tailored BNPL regulation

On the theme of The Next Wave of Financial Innovation at the Innovate Finance Global Summit 2023, BNPL stalwarts Alex Marsh, head of Klarna UK, and Michael Saadat, head of international public policy at Block, discussed incoming regulation for buy now, pay later (BNPL) and the opportunities for the UK to set the tone.

Block’s Michael Saadat and Klarna UK’s Alex Marsh

In a discussion titled Delay Repay: Is BNPL Fit For Purpose?, the pair said they are looking forward to the “seismic shift” in regulation heading for the sector, which will see BNPL fall under the remit of the Financial Conduct Authority (FCA). Currently, interest-free, short-term loans of less than 12 months are exempt.

Giving a lay of the land, Klarna’s Marsh outlined how BNPL in the UK has ballooned, with a third of adults – 20 million – estimated to have used BNPL at some point.

“It’s been quite phenomenal growth over the past couple of years, particularly off the back of a shift to e-commerce during the pandemic,” Marsh says.

Although credit cards still “dwarf” BNPL, looking to Klarna’s home country Sweden, Marsh says: “BNPL now stands at 25% of payments in Sweden, while credit cards have dropped to 17%.” He expects to see a similar shift occur in the UK.

While BNPL has a bit of a reputation as a Gen Z mainstay used for fast fashion, Marsh says the product has long since expanded into other retail sectors and the average age of a BNPL user is now 36, only four years younger than your typical e-commerce shopper.

Saadat says his firm “has been on a bit of a journey here in the UK”, referring to the Woolard Review’s recommendations that BNPL should be regulated in a proportionate and “tailored way”.

“We think having the right regulation for the sector is really important for consumer confidence and consumer protection,” Saadat adds.

However, “regulation does need to be fit for purpose, particularly when you’re starting from a foundation of consumer credit legislation that was introduced in 1974”, Saadat says.

One size does not fit all

Ensuring that customers have the same protections whichever credit product they use is welcome, Marsh says, but carrying over “outdated, prescriptive” Consumer Credit Act regulation should be rethought.

Paying with BNPL at checkout may take around 90 seconds currently, but hemming BNPL in with prescriptive regulations could create “disproportionate friction” and drive up that customer journey time to more than five minutes, Marsh thinks.

Saadat believes creating a level playing field between BNPL products is key to the sector if it is to thrive. While there is a diversity of products, “ultimately, we have got an industry that has products that look quite similar and work in quite similar ways”.

Saadat highlights how under current proposals, regulations would not cover BNPL products offered by retailers, unlike the EU or Australia and New Zealand. “We don’t think that makes sense,” he says.

Marsh believes this discrepancy could create confusion for consumers around if and when they should expect protections.

“It continues, unfortunately, to give leverage to incumbents who frankly have used the regulatory standing of these products over the past couple years as a stick to beat these products where in reality, they should just be focusing on their own products and improving the quality and service offerings of their existing products,” Marsh says.

UK ahead of the pack?

Saadat believes the UK got an “early start” with BNPL regulation, with the Woolard Review the first to identify the need for regulation and that the regulation “should be proportionate”. Nonetheless, other jurisdictions are catching up.

However, in contrast, the EU, Australia and New Zealand are looking to implement regulation that reflects “how these products actually work, rather than trying to make them fit within a regulatory model that is quite outdated”. This is a challenge the UK Treasury needs to solve, Saadat adds.

The UK has a “real opportunity” to lead in this space and be “agile, responsive and flexible”, Saadat says, as it’s seen globally as a “critical jurisdiction” when it comes to fintech regulation.