Trouble ahead for BNPL as consumer spending slows
Buy-now-pay-later providers are facing a looming storm, as the UK government prepares to bring in long-awaited regulations for the sector. Ahead of this, market leader Klarna is already seeing record losses – as consumer spending slows.
With economic conditions tightening, and investors becoming increasingly wary of risk, the buy-now-pay-later (BNPL) bubble could be on the verge of bursting. Market leader Klarna has reportedly seen its losses more-than-triple, with consumer spending slowing around the world.
The firm, which slashed jobs earlier in the year to reduce its workforce by one-tenth, is a market leader in the BNPL space. However, it suffered losses of £499 million in the first half of 2022 – a figure which it blamed on rapid international expansion, higher credit losses in new markets, and rising staff costs.
Klarna, which is the biggest buy now, pay later provider in Britain, with 18 million customers, maintained that its UK business was “performing strongly”, with credit losses having declined to a “historic low” of about 0.4% of purchases. However, the company, along with the wider BNPL sector, faces a future crackdown in the UK – where there is currently no regulation of BNPL products.
In June 2022, the UK government officially responded to calls for BNPL regulation, highlighting potential risks to consumers from Buy Now, Pay Later loans. These included the ability of shoppers to borrow more than they can afford, while terms and conditions often lacked clarity (58% of BNPL users aged 18–24 and 49% of those aged 25–34 do not believe it consists a debt agreement), and credit ratings could suffer as a result.
Plans are now drawn up to include BNPL in the Consumer Credit Act 1974, with lenders required to seek FCA approval and offer consumer affordability checks. In addition, incentives to apply for BNPL loans will be subject to the Financial Promotion Regime to ensure they aren't misleading. Shoppers will be able to complain to the UK’s financial ombudsman if issues arise following a BNPL purchase – which is likely to impact the BNPL market further.
