Swedish consumer-protection legislation will hit fintechs

New financial regulation to protect consumers from agreeing to unnecessary credit will force financial technology companies to make changes to their products

New e-commerce legislation proposed by the Swedish government to protect consumers from unnecessary debt has ruffled the feathers of the country’s leading digital banking actors.

The legislation, which would give consumers added protections in paying for goods purchased, has been criticised by the Nordic digital banking industry, including prominent player Klarna, as an “unnecessary over-reaction” by the government to growing personal debt in Sweden.         

The Nordic region’s rapidly expanding digital banking sector includes about 100 e-payment firms, and most of the current crop started life as investor-supported financial technology startups (fintechs). Apart from Klarna, the other significant players in this digital e-commerce space include licensed Nordic niche banks Nordnet, Ikano, WyWallet, Mobile Pay, Swish, Komplett, ICA and Avanza.

Sweden’s financial markets ministry has been tasked with introducing the legislation. The proposed regulations are intended to strengthen the country’s consumer protection laws and provide greater safeguards for people using digital banks’ e-payments service. The new law would bring digital banks more into line with the consumer credit protection rules that govern traditional high-street banks. 

Financial markets minister Per Bolund said the new regulations are needed to provide stronger protection for consumers using online shopping sites.

“There is a genuine need to regulate the e-payments sector more closely,” he said. “The payment options that so-called digital banks offer often come with hidden costs in the form of interest or late fees. This is especially the case with ‘buy now, pay later’ payment alternatives. Most digital banks routinely highlight the more costly payment options, rather than the cheapest. This is something we want to change.”

The financial markets ministry presented the e-commerce payments bill to the Riksdag, Sweden’s national parliament, on 4 February. The bill proposes new regulations that will require digital banks and the e-payments industry to offer the lowest-cost direct payments option to consumers when purchasing goods, and before higher-cost alternative credit payment options are mentioned in relation to online e-commerce transactions.

Under the legislation, digital banks and the e-commerce industry will be prohibited from presenting credit payment options to consumers ahead of direct payment methods. Such companies will also be disallowed from marketing online delayed credit payment as “first choice” ahead of the lowest-cost direct payment option for consumers.

Read more about fintech in Sweden

The new law will require digital banks, and other operators in the e-payments domain, to highlight direct payment as the lowest-cost purchase financing option in all of their online and general marketing materials, said Boland.  

The legislation specifically targets the “buy now, pay later” financing options that have become popular with digital banks. These generally require payment for goods to be made within 30 days, or consumers can opt to pay by monthly instalments over a longer period.

These delayed credit-based payment options can incur additional administrative costs and added-on interest fees for consumers, said Bolund.

“Consumers are not always aware that ‘buy now, pay later’ can carry high interest rates,” he said. “The new legislation reflects the government’s concern over the rising risk of personal indebtedness in Sweden. This can lead to bad personal credit scores. In this respect, it is important that consumers have sufficient safeguards to enjoy improved control over their personal finances.”

As expected, the Nordic e-payments industry’s response to the new regulations has been generally negative. The digital banking industry holds the view that consumers must remain the best arbiters of their own purchase choices and personal finances. In short, the industry opposes state involvement, particularly on the legislative side, to further regulate how the sector structures and presents its online payment options.      

“There is universal agreement that a situation where consumers are pushed into taking credit is not good, and naturally this should not happen,” said David Fock, Klarna’s group product manager at Klarna. “But it is important to clarify that the image being painted of companies operating in this sector is gravely misleading. The new rules are likely to run counter to consumer interests and the individual’s right to choose.”

But Borlund said the Swedish government had given digital banks and the broader e-payments sector “ample warning” about the need to alter their marketing and lending practices. Also, industry chiefs were kept in the loop about government plans to introduce extra consumer protections, he added.

“We warned the digital payments industry that we would take this action,” he said. “We asked the industry to take a fresh look at its practices. But despite knowing that new rules were coming, we observed no corrective action or visible willingness by companies to change their behaviour. This is regrettable.

“Real issues like this can undermine public trust in the e-commerce market. Consumers who feel they are not getting best value for money may be deterred from shopping online. This would be a negative consequence for everybody.”

Powerful forces

The digital banking and e-commerce sectors are rapidly becoming powerful forces in the Nordic financial services arena. The growing significance of this sector is reflected by Klarna, which became Europe’s highest-valued private fintech in August 2019 after it raised €424m from a new capital funding round. Klarna’s market value currently stands at over €5bn.

Klarna has disputed the Swedish government’s view that delayed credit payment options on e-commerce goods purchases are imbalanced and structured to favour financial gains for e-payments providers. Digital banking chiefs argue that credit-based purchases incur the same costs as direct payments if consumers repay the outstanding amount on time.

But despite their protests, it is unlikely that Klarna or other industry actors will mount a legal challenge to the proposed e-payments regulations.

Market-expanding digital banks such as Klarna are mindful of the risk of legislative backlashes from governments in Sweden, Europe and North America if they fail to comply with the new regulations.

The e-commerce payments bill is the latest encounter between Klarna and the Swedish government. Bolund and consumer affairs minister Ardalan Shekarabi invited Klarna CEO Sebastian Siemiatkowski for talks in May 2019 to discuss government concerns over a range of digital banking and e-commerce issues, including identity theft and customer debt. Klarna gave the government assurances that it would continue to strengthen its customer data collection, management and storage protocols and systems.

Also last year, Klarna found itself the subject of a probe by Datainspektionen, Sweden’s data protection authority. Datainspektion investigated suspected breaches of General Data Protection Regulation guidelines by Klarna, along with personal data-handling shortcomings, following complaints lodged by customers.    

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