Consumer protection regulations are essential to healthy markets, and we at Klarna strongly welcome those efforts. However, it is imperative that regulators here in the United States consider how an overly prescriptive regulatory regime can actually stifle the progress of innovative new business models in the financial technology sector and can lead to not only less choices for consumers but also less competition for the largest companies.
This is particularly true in the credit markets, where heavily prescriptive regulatory approaches can dampen healthy and innovative competition, resulting in more of the same old high-interest credit schemes with consumer debt-driven companies reigning supreme.
That is why Klarna is excited about the U.S. Consumer Financial Protection Bureau’s (CFPB) regulatory efforts to bring about a more fair, transparent and competitive financial market for American consumers. We applaud the Bureau’s recent announcement on the opening of an Office of Competition and Innovation as part of their new approach to helping spur innovation in financial services through competition, and identifying impediments for new market entrants.
Particularly, we commend the new Office’s charge of ensuring market conditions in which “consumers have choices, the best products win, and large incumbents cannot stifle competition by exploiting their network effects or market power.” Essentially, those principles are at the core of Klarna’s mission.
This new office is an opportunity to break from the traditional prescriptive approach to regulations – and a general cynicism around financial technology (fintech). This old view turns regulations into a check-the-box exercise for lawyers and favors first-to-market companies, with their army of lawyers, over new and more innovative start-ups, which often offer consumers a better product
The Bureau’s stated impetus and objectives for this new Office are great examples of why a consumer centric, outcomes-based regulatory approach regarding technological advances in financial services.
Competition is one of the best drivers of innovation and, ultimately, consumer protection. Companies that exist in truly competitive markets are essentially forced to treat their customers well, or they’ll pay the price. Their need to satisfy customer demand is what drives technological innovation.
Over the past decade or so, while traditional financial institutions continued to rely on consumer-driven revenue and exorbitant fees, fintech companies have come along to offer the same or better services for less – or nothing. And viola! The major card companies began scurrying to address those consumer needs that had long been right there in front of them.
Since our launch in the U.S. in 2015, our mission to improve consumer choice and safety has quickly made us one of the largest and most loved providers of “Buy Now, Pay Later” (BNPL) and payment products in the U.S. Today, Klarna serves more than 28 million U.S. consumers and has over 22 million app downloads across the nation. Indeed, that speaks to how well we are meeting changing consumer demands by helping millions of Americans choose to use a better product that saves time and money, while also becoming more informed and in control of their finances.
While regulation is often necessary to ensure the benefits of competition truly serve consumers, we believe these regulations should be outcomes-based rather than prescriptive or formulaic. Larger companies – like incumbent banks and traditional credit providers – have the resources in place to meet the demands of even the most stringent rules, often reducing them to simple check-the-box exercises which lose sight of the original intent. By contrast, smaller companies or start-ups, the very ones poised to offer the innovative competition to drive down costs and improve services to benefit consumers, on the other hand are often inhibited due to the cost of complying with new or changing regulations.
Take Klarna for example. We partner with 17,000 retailers in the U.S. and hold more than 50 state licenses. Klarna generates more than 90 percent of our BNPL revenue from retail partners. What does that mean for our users? Klarna is incentivized to have our users pay on time, not for them to miss payments or roll over debt. Our flexible payment solutions are interest free, allowing us to extend credit to consumers who wouldn’t otherwise receive it.
Given our global scale, from a pure business perspective, we would actually now benefit from additional barriers for new entrants, making it more onerous and complicated for competing firms to expand or consumers to switch providers. And, that is exactly what the largest banks have been advocating for – especially when it comes to giving consumers control over their data.
This approach is wrong-headed and ultimately does nothing except deprive consumers of additional choices and chills competitive innovation. In some of Klarna’s largest markets – the U.S., Sweden, Germany and the U.K – just 8% of consumers switched banks last year. This stickiness likely has nothing to do with perceived value, but more because banks have made it extremely difficult to switch.
For example, in 2019 during a George Mason Law & Economics Financial Services Symposium, former CFPB deputy director Brian Johnson stated:
“One of the advantages of prescriptive regulations is that compliance is easily identifiable. Arguably, prescriptive regulations are easier to monitor and enforce, but they provide very little flexibility. They have been thought to impede innovation; as companies are less inclined to invest in new technologies or materials for fear that they may not comply with regulations. Additionally, skepticism around regulatory developments may make investors more wary of giving to new companies, drastically reducing the likelihood that new companies can gain a large enough foothold in a sector to withstand the onslaught of bigger companies introducing their own products in the space.
In contrast outcome-based regulations, also known as performance-based regulations or results-based regulations are thought to be more flexible and less costly. Performance objectives or results are clearly outlined but the industry is able to decide for itself how it will achieve these results. Companies also have an improved understanding of their regulatory obligations and can be held more accountable to the results they produce because of their active participation in the regulatory process.”
Prescriptive regulation and the related decrease in market access for innovative concepts disincentivizes companies from providing the best experience that consumers want and like, and discourages companies from building their business model around products that offer an alternative to debt-driven enterprises. Whereas an outcomes-based regulatory environment, or a hybrid approach can serve as an incubator for innovation and a hub for healthy competition, ultimately driving companies towards improving consumer’s experience and overall satisfaction.
In order to advance competition and innovation in the consumer credit market, Klarna is of the opinion that effective regulation should aim to do three things:
- Promote mobility and choice;
- Regulate outcomes, not inputs; and
- Be proportionate and based on risk
The CFPB’s new Office of Competition and Innovation can play a critical role in making that effort a reality and we look forward to working with the agency and other stakeholders to discuss ways to advance the goals the Bureau has outlined.