The Buy Now Pay Later sector (BNPL) has seen a surge of activity since the start of the pandemic as consumers turned to online shopping and welcomed the option to purchase trending items of clothing, beauty products and other goods without parting with all of their cash up-front.
More and more BNPL options, including Klarna and Clearpay, have appeared in the online checkout section as a simple and easy way to spread payments, interest free, over several instalments.
However, concerns have been raised about the lack of regulation of BNPL lending and how this might be negatively affecting consumers who are drawn in by the lure of “interest free” loans without the need for a credit card.
Citizens advice reported in April of this year that a quarter of young people making Buy Now Pay Later repayments haven’t been able to pay for food, rent or bills as a result.
“The ease of obtaining BNPL products is giving regulators food for thought as the risks of large-scale uptake of unregulated finance becomes clearer,” explained Dan Jones, a financial services regulatory lawyer at Baker Botts in London, which advises technology sector companies including payment services and fintech firms.
Unlike most other forms of credit, where it is repayable within twelve months in twelve or fewer interest free repayments, BNPL is not regulated by the Financial Conduct Authority.
While this contributes to ease of use because it removes many of the regulatory burdens associated with sale of regulated products it also means that the protections associated with FCA regulation do not apply. In February 2021, the FCA Board commissioned a review into the unsecured credit market.
Jones told City A.M.: “Currently, BNPL benefits from an exemption to existing regulation that was created to help consumers access low risk, short term financing and maintain financial stability without the need for high interest “pay day” type lending.”
Lenders kept in the dark
Lenders have been kept in the dark about what regulation of BNPL could look like, and despite the Treasury, in February of 2021, confirming that legislation was coming an exact date for implementation is yet to be published.
Some firms are already seeing the opportunity for competitive advantage and, rather than denouncing regulation, firms such as Klarna have actively welcomed it.
“Early regulation of the sector may come in the form of removing the exemption so that the rules, applied by the FCA to other consumer credit businesses, also apply to BNPL,” commented Jones.
“BNPL firms might reasonably be expected to know whether their customers face financial difficulty and customers should not be incentivized to buy more than they can afford through use of BNPL,” he added.
Compare the Market showed in May 2020 that forty-one percent of BNPL users were not aware that their credit score could be impacted by failure to repay their BNPL credit with forty-five percent of respondents having missed at least one BNPL repayment in the past year.
BNPL providers will have to make clear to customers that the product they are buying is regulated credit and that there are risks associated with failure to repay on time.Dan Jones, financial services regulatory lawyer at Baker Botts in
“It won’t be possible for key terms of service to be tucked away on separate web pages and customers should be encouraged to actually read them,” Jones noted.
Providers and retailers
Regulation could also impact the relationship between BNPL providers and the retailers who promote their services.
“If BNPL becomes a regulated activity, those that market it may need to be regulated as credit brokers. High street retailers will need to review how they market BNPL services or may themselves need to get regulatory permission. The additional regulatory burden is something which many retailers may not wish to take on,” Jones said.
However, the FCA’s board review made clear that there are many social benefits to consumers having access to short term, low cost credit.
“This is particularly true for consumers who are forced to accept high interest rates because their credit rating precludes access to low cost options,” Jones continued.
“A balance is clearly needed between ease of access to affordable credit for all corners of society and regulatory hurdles which might put some consumers off but afford certain protections for the most vulnerable.”
It’s been several months since a call for regulation was made, and the final form of regulation won’t become clear until HM Treasury has completed its drafting.
“There is an opportunity here for BNPL providers to embrace regulation and the protections it affords consumers, making it another great reason to select the BNPL option at checkout”, Jones concluded.