The rise of buy now, pay later schemes has been remarkable in the UK. New financing products have flooded the market and revolutionised the online retail and consumer credit market. The use of delayed payments has nearly quadrupled in 2020, with 5 million people using them since the start of the pandemic.
Klarna, now the second most valuable fintech startup in the world, announced a $45.6bn valuation at its latest fundraise. The rise of these products has left traditional credit providers, banks, online merchants, payment providers and regulators alike all around the world scrambling to keep up.
The arguments in favour of buy now, pay later schemes are well known: customers pay in instalments, with no interest charges, giving them much more flexibility than a traditional credit card. In turn, online retail providers are able to offer a more diverse array of payment options. Firms using Clearpay, another big player in the space, reported seeing a 30 per cent boost in the value of their orders.
The criticism has also been robust, with sceptics arguing that many of its Millennial and Gen-Z users are taking out debt they cannot service with the lure of interest-free payments. Many people aren’t always aware they enter into credit agreements that could result in late payment fees.
Across the world there have been moves to crack down on delayed payment products. The UK’s Financial Conduct Authority published a review with a slew of recommendations, including affordability checks and provision of debt advice, to make the industry more sustainable. Australian regulators are in the midst of a review for buy now, pay later rules and industry experts are expecting similar scrutiny in the US under the Biden administration.
It’s clear some of the suggestions from the UK’s review are eminently sensible. As MPs have rightly pointed out, no one wants another Wonga loan scandal. Delayed payment products cannot come at the expense of responsible lending.
With that said, any regulation has to be light touch and cannot stifle the progress of growing fintech companies. In a post-Brexit world, Global Britain must ensure the industry is not overburdened with red tape. Our departure from the EU has created an amazing opportunity for London to be at the centre of banking and fintech for the future, and we must allow innovative startups to flourish. A crack-down for the sake of a crack-down would hurt retailers, consumers and Britain’s growth.
Allowing innovation in finance would also help BNPLs to grab business from traditional credit cards. For consumers, the potential for savings on interest payments will only increase and it can in fact encourage responsible debt practices.
Of course the industry has a duty to ensure it is enabling customers to make the right choices, rather than tempting them to make purchases they can’t afford. The future of retail is in flux and deferred payment schemes have an opportunity to create a new consumer credit environment that is fairer and more transparent.