The way people pay for goods and services is changing. Consumers prefer new and better ways to bank, pay and shop, like Klarna, and are using them to replace other, outdated forms. In recognition of this, the Financial Conduct Authority (FCA) has been asking the industry for its opinions on regulation as part of its review of the ‘unsecured credit’ market. Preparing our written submission and working in Klarna every day, a fully regulated bank across 17 markets, led me to reflect on the shifts we are seeing and our conclusion that the time is right for regulation. I would like to share some of my thoughts here.
Consumers want new ways to pay.
For years now, consumers have been abandoning credit cards in favour of debit cards. In December 2019 consumers in the UK spent more than 1bn less on their credit cards than they did just six months earlier; the same figures for debit cards show a £1bn increase. According to Worldpay, the share of global e-commerce transactions paid for using a credit card will fall from 24% in 2019 to 19% in 2023.
In some countries credit cards have been almost completely replaced. For example in Sweden, where Klarna was founded in 2005, credit cards were used for just 12% of ecommerce purchases in 2019, with consumers switching to other services like Klarna.
In the UK there are now over 10 million consumers who have used our products and we enabled well over 20 million purchases in the past year alone. We have many millions of very happy customers of all ages. Over 80% of people on Trustpilot describe our service as “excellent” and we have fewer than 4 complaints for every 10,000 purchases we process which is phenomenally low in the banking and payments sector. But let’s be clear, we want to get this to zero.
Credit cards are very last century.
So why the shift from traditional credit cards to debit? Whilst an innovation in the 1950’s, unfortunately 70 years on it feels very little has progressed – open credit lines, high interest rates and indecipherable statements. The ability to roll debt over indefinitely with minimum payments has been a major source of revenue for banks, but a less than ideal way for us to manage our money. Sadly the most profitable customers are still those who are unable to pay off their full balance on time and carry debt long enough to get whacked with 35% interest rates, or too often even higher. Like their cousins in the US and Australia, consumers in the UK have woken up to this, reducing outstanding credit card debt by £10bn in 2020.
So consumers today are using debit cards for most of their day-to-day spend. But with a debit card, the money leaves your account immediately before receiving your purchases and there are fewer protections if something goes wrong. Why should you, for example, have to pay upfront for something before you have held it in your hands, tried it on or made sure it works?
Additionally, if you do need to unexpectedly make a larger purchase, if you don’t have the available funds the alternative can end up being an overdraft, which like a credit card, is an open-ended rolling credit limit which can get out of hand. Not to mention that overdraft interest rates can be as eye-watering as their credit card brothers, charging up to 40%.
Consumers want to use debit cards for most of their day-to-day spending and use their own money in their bank account to pay but do require some flexibility to pay over time that doesn’t involve taking a loan or financial risk. This may be to try before you buy where the money only leaves your account when you have had time to decide whether you want to keep the item, or equally, to spread the cost of larger-value items into more manageable amounts to fit with their monthly salary cycle. There is a valid case for doing this and it is not, as many commentators seem to believe, irresponsible to do so.
We think this is a healthier and more controlled way to shop, rather than the traditional model of being approved for a generous credit limit with a balance that can often take years to pay back, without even considering the interest paid. We know there is a better alternative to this for consumers and most importantly consumers are recognising that too.
We offer a better and more controlled way to manage your spending. On our most popular products in the UK, we charge no interest or late fees ever and offer a structured repayment schedule over 2 months or less. We assess eligibility on every single transaction and if you have overdue payments, we freeze access to our service so consumers cannot increase or roll-over amounts indefinitely. With Klarna’s core products, you can never owe more than the cost of the item. What you see is what you pay, forever. There is no interest or late fees, of any kind, ever. If you don’t pay, we’ll block you from using our service, but the amount you owe will never grow. We also have spending insights tools, help consumers manage returns with retailers and have buyers protection if something goes wrong with your purchase.
The time is right for regulation.
As a result of the shift from credit cards to alternative options more fitting for the debit economy, there is now a growing focus on the sector from politicians and regulators. The FCA is currently reviewing the regulatory oversight across all types of unsecured lending in the UK. We are fully engaged in this process and agree it’s the right time; some parts of the laws underpinning UK regulation have not been reviewed for a very long-time and frankly are no longer delivering on good customer outcomes, while interest free products offered by Klarna and others are comparatively new and growing quickly in consumer preference. The process has also, finally, brought all the different sides and interests in the industry together to discuss these topics properly for the first time.
Many people aren’t aware that Klarna is a fully licensed bank and offers a number of products already regulated by the FCA, so we already operate to very high regulatory and operating standards, which we apply across all our products. This is not true of everyone. In our view, regulation has not kept up with innovation and the changes in consumer behaviour and we believe consumers deserve the highest protections no matter the provider or product they choose and regulation in the UK may now be the best means to achieve that. We fully support appropriate regulation which is fit for purpose and meaningfully improves consumer outcomes across the entire sector.
Some have proposed a voluntary code of conduct. While a code of conduct may be appropriate in some circumstances, we don’t believe that is the right approach for the UK market right now. Where voluntary codes of conduct have been attempted in other countries and markets, they are often a way to try to delay regulation, provide very little protection for consumers and are too frequently a race to the bottom in standards as different providers, each with different approaches to the market, try to agree on a common set of principles. At Klarna, as the largest provider in the UK market, we believe we will have a more positive impact on the industry if we lead from the front, driving standards up across the industry in advance of the introduction of regulation.
Some questions are beyond debate.
As we start to think about what that regulation might look like, the answers to some questions are obvious. For example:
- Of course financial promotions should be clear and transparent. Where consumers may end up paying interest or late fees, it should be 100% clear when they are signing up. We constantly review our own transparency, not just on fees but on all details consumers need to know when signing up to one of our products.
- Of course any provider should be performing eligibility checks to make sure they are only offering their services to those who they believe can and will pay.
- Of course consumers should enjoy the same purchase protection rights regardless of the type of payment product they’ve used.
- Of course vulnerable consumers should have the same flexible approach to protection for unregulated products as for regulated (earlier this year during lockdown we launched hardship measures for our customers a number of months before requirements were issued by the FCA);
- Of course consumers should be able to take complaints to the Financial Ombudsman Service regardless of whether a product charges interest or not.
We believe the FCA should focus on all these areas but regulation is complex and will likely take time to put into place. So we should not stand still.
We are customer obsessed – but what does that mean?
While the regulators are doing the important and painstaking work of building a new regulatory framework, we are already making changes to our business which we think are better for consumers. We often say we are “customer obsessed” but what does that mean? It means that we make firm commitments to put the best interests of our customers first, above all else. You can read those commitments here.
It also means that we are constantly looking at ways we can improve the experience for our customers and here are four ways we have done that recently:
Klarna and our partners should be responsible about how we promote our products: We’ve worked with our merchant partners (our retailers) to help them communicate about our products responsibly. You can read more about our approach to marketing in the UK here.
Consumers should only use our products if they want to: Klarna is no longer the default payment option at checkout for new customers, so no-one uses our products for the first time unless they select them. For returning customers, some retailers auto-select your last payment choice, whether that’s a credit or debit card or Klarna – so please keep that in mind when you’re next at a checkout.
Consumers should be clear about what they are getting into: We’ve updated the text on our check-out page to be clearer than ever that to use one of Klarna’s products, customers must be over 18, pass our robust eligibility checks and be aware of the implications of missed payments on their future use of our products.
The industry should know who can and cannot access these services: We are well progressed in talks with the Credit Reference Agencies (CRAs) to figure out a way to ensure there is more visibility over the levels of debt which people have and previous missed payments. Today, the CRAs don’t have the processes and infrastructure in place to allow us to do this in a dynamic way which is proportionate to transaction size typically use Klarna for. We strongly believe that solving this is in the best interest of consumers as it allows all providers to continue to ensure that consumers are only using these services who should.
Chris Woolard, who is chairing the FCA’s current review into unsecured lending, said recently that his report, due out in the New Year, is the start, not the end of a journey.
This debate will continue long into the future, as it should. Consumers want transparency, flexibility and security, how this looks today, is different from yesterday and will be different again tomorrow. But while that is happening, we will continue to do what we have done for the last 15 years – listen, innovate, make continuous improvements, and do all that we can to put our consumers’ best interests at the heart of our products every single day.
Alex Marsh, Country Lead, Klarna UK