In late spring, some of Britain’s most powerful political figures met in a London restaurant with the CEO of Europe’s most valuable privately owned start-up. The dinner was attended by the Home Secretary Priti Patel, broadcaster Andrew Neil and the former prime minister Tony Blair, as well as Sebastian Siemiatkowski, the CEO of the buy now, pay later (BNPL) firm Klarna, two sources told the New Statesman.
The gathering, which was paid for by Klarna, served two purposes. It gave Siemiatkowski the chance to introduce some of Britain’s most influential figures to his fast-growing company, and to persuade them that plans to regulate the BNPL sector needn’t be too aggressive. For the government, meanwhile, it provided an opportunity to reassure Klarna’s chief executive that, in light of Deliveroo’s disastrous IPO (share listing), London remained the best location for the $46bn start-up’s own plan to go public.
The meeting marked the culmination of a spirited charm offensive by the darling of the European fintech sector. In recent months, Klarna has hired Facebook’s UK communications director to lead its PR operations, an experienced lobbyist as its head of public policy and a former senior Financial Conduct Authority (FCA) official to manage its public affairs work.
Amid a wave of criticism from campaigners and politicians, Klarna’s executives are concerned that the company could soon be hit with what they see as overly prescriptive regulation. In January, 70 cross-party MPs published a letter warning that buy now, pay later firms could produce “the next Wonga” (the now defunct payday-loans firm that was notorious for its interest rates). “Many people have [financially] overcommitted themselves using buy now, pay later companies, and we are facing mass redundancies, furloughing and drops in income,” said the Labour MP Stella Creasy at the time. “So even if you think you could afford it now, you might not be able to later.”
Klarna, the market leader, and its rivals fiercely contest the idea that their businesses pose as significant a risk to consumers as Wonga, which went into administration in 2018 following a crackdown on the sector. While Wonga and other payday lenders charged extortionate interest rates, Klarna’s deferred payment scheme, which is used for purchases on fashion and furniture sites among others, doesn’t charge consumers interest, instead charging sellers a fee for using its service.
But MPs, regulators and campaigners are concerned that BNPL providers are failing to make it clear to customers that they are taking on a loan. As the New Statesman reported last year, two fifths of people who use BNPL schemes aren’t aware that missed payments can affect their credit rating, while nearly half of BNPL users had missed a repayment.
Klarna said that, unlike some of its rivals, it doesn’t issue late fees and that only one of its products, “Financing” (which is regulated and typically provides a longer repayment plan), can affect a customer’s credit score. It also said that it makes clear at checkout that its Pay Later products are credit products.
Despite this, the company has been accused of irresponsible messaging. Last December, the Advertising Standards Authority forced Klarna to remove four ads that had been promoted by Instagram influencers during lockdown. The regulator found that “in the context of the challenging circumstances caused by the lockdown at the time, including impacts on people’s financial and mental health, the ads irresponsibly encouraged the use of credit to improve people’s mood”.
Some commentators have also raised concerns that Klarna normalises using credit for payments that could be paid instantly. As the Financial Times reported, this allows consumers to spread the cost of items costing just a few pounds over several months. And while some BNPL firms including Klarna carry out credit checks, it is has been claimed that they do so to minimise their own risk, rather than assess affordability. (Klarna contests this, noting that unlike credit card companies it has no incentive for customers to postpone repayments, because it doesn’t charge them interest.)
Just weeks after the MPs issued their letter, the government published the Woolard Review – a report into buy now, pay later lenders which called for the sector to fall within the FCA’s scope. The report revealed that BNPL firms had the “potential to create high levels of indebtedness”, especially when used together. “If I’m at my limit with Klarna, I’ll look and see if the shop offers another type,” one user told the review’s authors. Some BNPL providers had told retailers that they could increase sales by up to 30 per cent in this way.
“The review highlights the rapid growth of BNPL as a form of unsecured credit and sets out the considerable potential for harm to consumers using BNPL,” wrote FCA chair Charles Rendell in a letter to the Treasury. “It concludes, therefore, that BNPL should be brought within regulation. The FCA Board agrees with the review’s analysis of BNPL and agrees that there is a strong and pressing case for regulation of BNPL business.”
Five months later, the FCA published its roadmap for regulation. “Subject to the Treasury’s consultation on the scope of the regime, we plan to consult on new rules in 2022,” it stated. “Our aim is to increase the availability of legal alternatives to high-cost credit by raising consumer awareness and tackling barriers to access. We want to make sure firms properly assess consumers to ensure they can repay their loans. We also want to make sure firms treat consumers who fall into arrears fairly when collecting their debts.”
Klarna has publicly called for new regulation and says it has set the highest standards for the industry. But sources said its executives are concerned about the prospect of an overzealous regulatory response.
In a statement, Alex Marsh, Klarna’s UK CEO, told the New Statesman: “We welcome proportionate regulation that benefits consumers and increases choice, mobility and innovation. Our business model relies on people paying us back because we don’t charge consumers fees or interest, so we offer an alternative to high-risk, high-interest credit cards that encourage debt. We’ve actively called for regulation of the buy now, pay later sector to drive up standards, and we look forward to working with the FCA, government and wider industry to build a modern regulatory framework that brings value for consumers.”
But in late May, around the same time as the dinner, Klarna’s Siemiatkowski hinted that London would be a more attractive location for the company’s IPO if the government used Brexit to pursue less rigid regulation. In an interview with the Financial Times, he singled out rules around know-your-customer checks, anti-money laundering and privacy. “Those kind of opportunities lie for the UK now: to go through regulations and look at ones that are too prescriptive.”
Siemiatkowski said Klarna had “a responsibility to guide consumers to the right choice”, but that “there must be some end to our responsibility”. “If people want to regulate against buying more than four sweaters a year online then fine… [but] there’s a limitation to how much we can do.”
Joakim Dal, a partner at GP Bullhound, one of Klarna’s investors, said it is common for companies to select a listing destination based on how welcome they feel in a market. “[That includes the] perception of the company among consumers, the perception of the company among investors and merchants and also among regulators, politicians and other competitors in the space.”
For campaigners, however, the location of Klarna’s IPO will be of little concern. Their priority is to prevent BNPL users routinely taking on significant debts without understanding the consequences. Klarna, its critics and its competitors will be watching the FCA’s next steps carefully.