Breakingviews - Buy-now-pay-later exposes regulation blind spot

People rest with shopping bags at Macy's Herald Square during early opening for the Black Friday sales in Manhattan, New York City, U.S., November 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 Aussie rival see themselves as tech platforms that spur retailer sales, rather than conventional financial institutions. But the so-called buy now, pay later (BNPL) model they champion creates credit that could be seen as bank-like. Regulators need to decide what they are.

Right now BNPL is neither systemically important, nor the preserve of a radical few. Its overall share of the payments pie is minuscule compared with the $10 trillion spent annually on credit cards worldwide, and incumbents like American Express, JPMorgan and PayPal have started offering similar products. Still, Capital One said on Monday it would bar customers from using credit cards to settle debts incurred when they buy items without paying upfront. The U.S. credit card provider warned these were “risky” transactions.

Capital One’s hostility is to be expected: BNPL providers are trying to eat its lunch. Still, it may have a point. When traditional credit card companies extend finance, regulators require that key details like customer income are passed to a so-called credit reporting agency, which then builds up an assessment of their creditworthiness. BNPL requires punters to divulge basic information like email addresses and phone numbers, and sometimes not even that. And it only passes details to a CRA if a customer misses a payment. On a traditional gauge of credit health – the annual loss rate on their loan books - Klarna and Afterpay’s ratios were 7.2% and 12.9% respectively, according to Breakingviews calculations. That’s way above the U.S. credit card charge-off rates in 2008, UBS research indicates.

BNPL defenders dismiss the catcalls. With a maximum of 30 days duration, their credit books can be turned over more than 10 times a year compared to two times for traditional banks. They claim loan loss rates should be calculated against so-called gross merchandise value (GMV) – the value of the products BNPL transactions enable. For both Klarna and Afterpay that’s under 1%.

As ever with fintech, regulators have to balance encouraging innovation with maintaining financial stability. But not all of Klarna’s products come under the UK Financial Conduct Authority’s rules, and Australia’s regulator is expected to rely on BNPL players’ self-regulation rather than pass legislation. As the innovation becomes a more important part of the economy, supervisors need to be clearer on the credit risk they represent.


Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.

Sign up for a free trial of our full service at and follow us on Twitter @Breakingviews and at All opinions expressed are those of the authors.