Breakingviews – Buy now-pay-later exposes the regulatory blind spot

People rest with shopping bags in Macy’s Herald Square during the early opening of Black Friday sales in Manhattan, New York, the United States, Nov. 28, 2019.

LONDON (Reuters Breakingviews) – Klarna and Afterpay are in a supervisory blind spot. The $ 10.6 billion Swedish fintech group and its $ 20 billion Australian rival see themselves as technology platforms that drive retailer sales, rather than mainstream financial institutions. But the model says buy now, pay later (BNPL) which they advocate creates credit that could be considered a bank. Regulators need to decide what they are.

At present, BNPL is neither systemically important nor the preserve of a few radicals. Its overall share of the payments pie is tiny compared to the $ 10 trillion spent on credit cards worldwide each year, and incumbents like American Express, JPMorgan and PayPal have started offering similar products. Still, Capital One said Monday it would ban customers from using credit cards to pay off debts when they buy items without paying upfront. The US credit card provider warned that these were “risky” transactions.

Hostility from Capital One is to be expected: BNPL providers are trying to eat their lunch. Still, he may have a point. When traditional credit card companies expand funding, regulators require that key details such as customer income be passed to a so-called credit reporting agency, which then establishes a credit score assessment. BNPL requires bettors to disclose basic information like email addresses and phone numbers, and sometimes not even that. And it only passes details to an CRA if a customer misses a payment. On a traditional gauge of credit health – the annual loss rate on their loan portfolios – the ratios for Klarna and Afterpay were 7.2% and 12.9%, respectively, according to calculations by Breakingviews. That’s well above credit card debit rates in the United States in 2008, according to a UBS study.

BNPL supporters reject the whistles. With a maximum duration of 30 days, their credit books can be renewed more than 10 times a year compared to twice for traditional banks. They say loan loss rates should be calculated relative to the so-called gross value of goods (GMV) – the value of products that BNPL transactions allow. For Klarna and Afterpay, it’s less than 1%.

As always with fintech, regulators must strike a balance between encouraging innovation and maintaining financial stability. But not all of Klarna’s products fall under the rules of the UK’s Financial Conduct Authority, and the Australian regulator should rely on the self-regulation of BNPL actors rather than passing legislation. As innovation becomes a more important part of the economy, regulators need to be clearer about the credit risk they represent.


Reuters Breakingviews is the world’s leading source of financial agenda information. As the Reuters brand for financial commentary, we dissect big business and economic stories from around the world every day. A global team of around 30 correspondents in New York, London, Hong Kong and other major cities provide real-time expert analysis.

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