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Is the Klarna “crackdown” really a crackdown?

New rules around BNPL are being drawn up to protect UK consumers, but Klarna and its peers look unlikely to pay a heavy price.

By Isabel Woodford

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You might have expected panic at Klarna HQ last week, following news that the UK will regulate its buy-now-pay-later (BNPL) space, making affordability checks on customers mandatory.

But despite talk of a “crackdown”, insiders at the $11bn startup report that all was calm on the Klarna front (“It was a non thing”), and I’m tempted to believe them — here’s why.

Although the new rules are still being finalised, most of the recommendations are pretty gentle, which should limit the commercial impact.

Take, for instance, making Klarna and its peers report to a central bureau when assessing users’ affordability. That will be time-consuming, but the experience of Laybuy, a publicly-listed BNPL company, shows this policy doesn’t necessarily affect growth.

Laybuy began reporting into Experian late last year, and told Sifted that using the UK credit bureau has not resulted in higher rejection rates (meaning payment volumes have stayed fixed).

The other big focus for regulators is confirming users’ identities. This could mean a clunkier experience for first-time customers, as Klarna users currently just provide an email address. Yet, again, Laybuy has already begun getting tougher on identity-fraud, and told Sifted it has not seen user acquisition fall.

This doesn’t mean Klarna’s margins won’t be affected at all, but it’s unlikely to take the wind out of their sails in the long term.

Indeed, a Klarna spokesperson noted most of the new rules seemed “reasonable”.

Rivals Laybuy and Openpay also told Sifted they don’t expect the FCA’s proposals to impact their businesses (although their use of late fees is being reviewed).

Meanwhile, a Clearpay spokesperson flagged that the regulator had urged “proportionate” action. The spokesperson added that the main commercial impact would be brought about if lawmakers impose “rigid” rules on how to test users’ affordability.

For context, Clearpay is the only major UK player which doesn’t currently carry out any credit checks on first-time users.

On the flipside, BNPL newcomer Zilch, which is already regulated as a credit provider, told Sifted it saw signups rise 23% following last week’s news. This suggests that — aside from regulation — Klarna will also need to defend against new competition to maintain its crown as the UK’s most popular BNPL app.

Worst case scenario?

Much still rests on the final legislation, as well as how the FCA and Financial Ombudsman end up managing the space.

But industry insiders say it’s “highly unlikely” we’ll now see tougher measures like limiting each retailer to two or three BNPL providers. That could have led to a price crunch, allowing merchants to pitch for the best rates.

Klarna will also be relieved that the FCA looks set to regulate BNPL providers rather than the products. If the latter happened, merchants would theoretically need a licence to promote them as financial products, voiding the hundreds of thousands of existing agreements with retailers.

“The FCA is going to think a lot before making a decision… BNPL is still the cheapest way to spread the [purchasing] cost by a mile,” said Philip Belamant, Zilch’s CEO.

Still, Australia-based fintech consultant Grant Halverson doesn’t buy it, accusing BNPL players of employing “bluster.”

“The[y] know regulation is coming and they simply[y] want to downplay it for stock price and VC valuation reasons. They all sniff Mark Zuckerberg’s vapors!”

The UK regulators’ decision could also have global consequences. Indeed, France and Australia are now expected to follow the UK in starting to monitor BNPL providers.

Isabel Woodford is Sifted’s fintech correspondent. She tweets from @i_woodford and coauthors our new fintech-focused newsletter. Sign up here.

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