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BNPL regulation must trigger deeper reforms to fix UK's credit scoring system
While there is a need to regulate the Buy Now Pay Later market to protect consumers against bad debt, writes Klarna's head of UK Alex Marsh, credit scoring also needs an overhaul.
A new year is beginning, and government officials tasked with protecting consumers face a big challenge. How can they prevent shoppers getting into too much debt, without stifling the better-value borrowing deals that nimble tech firms are now making more and more common?
Chief among these newer forms of credit is so-called “buy now pay later”. These typically allow customers to split a purchase into interest-free instalments over several months, or to pay for smaller purchases within 30 days. The company I work for is among the main providers of these “BNPL” offers.
Make no mistake, BNPL is soaringly popular, and not just among the younger shoppers who were its first users. Britons spent over £6bn a year using BNPL, according to industry estimates – a figure which is growing at 60 -70% a year. Klarna’s fastest-growing customer age-group is 40 to 54-year olds.
Meanwhile, credit card usage is in long-term decline – hardly a surprise when you consider the 21% average interest-rates they currently charge. Traditional lenders have spent decades punishing borrowers who fail to pay their monthly bill in full. But on our most popular BNPL products we earn no money from consumers, instead relying on a retailer transaction fee.
Even so, the new BNPL market is not currently regulated, and it needs to be. Most borrowers use BNPL responsibly, but there are a small proportion at risk of over-extending themselves across multiple forms of credit who may now be waking up to a post-Christmas financial hangover. They need better protections.
That’s why we welcome the consultation to regulate BNPL from Rishi Sunak’s Treasury. We made our submission to that consultation [last week], and have published it in full on our website.
The Treasury makes some very welcome proposals to protect BNPL consumers, all of which we agree with. It also acknowledges that all lending businesses, including BNPL firms, need to assess a customer’s ability to pay and repay. This is important for the customer’s sake, and for our own as lenders. The problem is that the means we have of making those checks are largely unchanged since the 1970s.
One option is to assess how good you are at paying back debts, by looking at whether you have run up big debts elsewhere. Klarna carries out “soft” credit checks on every transaction, which has proved effective in stopping problem debts piling up. Not every BNPL provider does this, however.
An additional test would be “affordability”: is this a debt you can afford, based on your monthly income and outgoings? Currently, there is no good way of getting to this information quickly - as anyone who has applied for a mortgage, and been asked to provide mountains of bank statements, will know.
We have been trialling “open banking” methods, in which consumers share their bank account transaction data with us, so that we have a real-time view of their financial position. And “affordability” is a smaller issue for BNPL than for credit card firms, anyway, because typically we only lend small amounts.
But none of this really addresses the biggest problem: the timeliness of credit data. All credit providers, including traditional companies like Barclaycard, use credit reference agencies such as Equifax or Experian, to check your ‘creditworthiness’. We’re working on ways to share information with them too. But the customer data provided by these companies is typically 4 to 8 weeks old.
To understand just how out of date that information might be, consider what’s happened in your world over the past six weeks. We’ve had Black Friday, the Omicron outbreak, Christmas and New Year… does your financial position today look the same as it did in mid November?
Many consumers will have overspent. Not knowing who has and who hasn’t doesn’t help us, and it doesn’t help people liable to get into financial difficulties.
Fixing the availability of real-time credit data is important, for all our sakes. That’s why I hope the Treasury consultation triggers a debate about deeper reforms to safeguard against dangerous borrowing.
The views and opinions expressed are not necessarily those of AltFi.