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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The UK government has finally arrived to clean up what it calls the “wild west” of “buy now, pay later” lending. A new sheriff will find that most of the cowboys in the sector have already cleaned up their act.
The Treasury’s pledge to bring BNPL providers such as Klarna and Clearpay under the regulatory remit of the Financial Conduct Authority is logical. Behind the digital sheen, the short-term credit provided by most BNPL services would be familiar to any old western general store. They should be subject to the same oversight as any other consumer finance. The previous government had the same idea four years ago.
Given the way banks generally protest about new regulation, it might seem strange that BNPL incumbent providers are not preparing for a shootout. The reality is that most have spent the past few years preparing for this, so the main impact will be to reduce any lingering uncertainty and create an additional barrier to entry for would-be rivals.
Klarna, for example, started carrying out credit checks — something regulators want to introduce as a matter of routine — in June 2022 without any painful disruption to its checkout process. If it were seriously worried about the potential impact of new UK regulation, it would have had to disclose the risk in the prospectus it published when it planned to go public earlier this year.
Alongside BNPL-specific rules, the government plans to reform the 50-year-old Consumer Credit Act, which, if anything, could help the sector. Lex has learned some BNPL executives have been lobbying chancellor Rachel Reeves for changes that would make it easier to offer loans at smaller retailers.
It is not that the bad and the ugly have disappeared from the sector. The tension at the centre of many BNPL models is that consumers’ interest-free loans are subsidised by payments from retailers banking on shoppers spending more than they otherwise would. If a severe downturn leads to customers struggling to repay, they — or enterprising claims management companies — may argue they were misled into reckless spending. Allowing customers to complain to the Financial Ombudsman Service, as has been suggested, increases that risk.
For BNPL executives, the bigger risk is the straightforward one of an economic downturn. The sector has never had its underwriting standards seriously tested, and it is unclear who will be left standing after a showdown. There has already been some consolidation since the late 2010s gold rush. Laybuy and Zip are among the lenders that have ceased operations in the UK. They won’t be the last.
Those that focus on slightly more affluent consumers, such as Affirm, or companies with other businesses they can fall back on, such as PayPal, may be well placed to pick up the pieces. They can also more easily afford the costs of regulatory compliance. It won’t hurt them to have a regulatory sheriff keeping lesser gunslingers at bay.
