Buy now, pay later – what’s the problem and what’s being done about it?

At the beginning of February 2021, the FCA published the Woolard Review. The Review states that “buy now, pay later” (BNPL) credit deals offered by online retailers via fintech companies (such as Klarna and PayPal) must be covered by its rules “as a matter of urgency” because of a “significant potential for consumer harm”. Under the proposal, BNPL products would become subject to FCA credit rules, meaning that providers would be required to carry out a “hard” credit check and affordability test on their customers. The proposal would also enable people to escalate their complaint to the Financial Ombudsman Service if things go wrong. In total, the Review has made 26 recommendations for how the FCA, working with partners, could improve the credit market. This article will look at the nature of the BNPL industry, reasons for the introduction of regulation, and the implications of the Review for the BNPL and the credit industry.


How does BNPL work?

BNLP allows consumers to spread the cost of a purchase interest-free. BNPL companies do not charge interest; instead, they make money by charging a fee to the retailer that uses their product, whilst some charge late payment fees to consumers. Up until now, BNPL companies have not fallen under the same level of regulation as other credit providers (e.g. credit card and loan companies). Other credit providers require FCA approval to lend and must conduct affordability checks, whilst customers can take their case to the Financial Ombudsman for an independent adjudication if things go wrong.


Why regulate?

There are numerous problems with BNPL not being regulated. For example, consumers often do not view interest-free BNPL as a form of credit, and so do not apply the same level of scrutiny that they would do, perhaps, when considering a credit card or pay-day loan. Moreover, with an average transaction value of £70 , BNPL is typically used for low-value transactions. But shoppers can take out multiple agreements with different providers, and costs can soon add up. BNPL customers are typically younger than those taking on credit (with 1/4 under the age of 24), and so perhaps do not possess the necessary information and experience to know what they are getting themselves into. The Review found that it would be relatively easy to accrue around £1,000 of debt that credit reference agencies and mainstream lenders cannot see.


Why regulate now?

The BNPL industry is populated by start-up fintech companies, offering a product that simply did not exist up until recently. For example, Klarna, having been founded in 2005, is now valued at $11bn and is Europe’s second most highly valued start-up. BNPL is offered by many well-known UK retailers (e.g. M&S, JD Sports, Asos and Boohoo), and its popularity is underpinned by its convenience and flexibility. The proposed changes could be viewed as the FCA attempting to keep up with progress in the credit industry, the introduction of new products and changes in consumer behaviour. Moreover, with several BNPL providers planning to expand to higher-value retailers and to offer their products in-store, this industry is likely to expose a larger customer base to greater risk, making FCA action more necessary.


In light of the Coronavirus pandemic, the FCA has stated that one of their five key priorities is to ensure that consumer credit markets work well. In particular, the pandemic has highlighted the importance – and potential dangers – of the BNPL industry. Firstly, with limited opportunities to purchase items in physical shops, the online retail industry has boomed, meaning more people have been exposed to BNPL products. Secondly, due to the financial implications of the pandemic, more people are likely to be relying on credit. In 2020, usage of BNPL products more than trebled in Britain, with total lending at £2.7bn. Some five million people have used them since the beginning of the pandemic.


What does this mean in practice?

Despite the Review suggesting that unregulated BNPL products need to be brought within the regulatory framework “as a matter of urgency”, and the economic secretary to the Treasury saying that the government would introduce the necessary legislation “as a matter of priority”, there are concerns over when the changes will actually take place. For example, providing sufficient credit information is an important part of the Review. Yet Klarna has said that credit reference agencies “do not currently have the internal processes and infrastructures necessary for [them] to share data on [their] buy now pay later products”, and that the speed of implementation will depend on the agencies’ capacities to develop these.


The impact of the Review also depends on the specific details of the regulation. For example, some consumer groups complain that displaying BNPL payment options at checkout in itself encourages consumers too much. It is also unclear exactly what redress customers who think they have been misled will have. There is also a potential problem of the regulation going too far. For example, the Institute of Economic Affairs, a free-market think-tank, has highlighted that if regulation is too “heavy-handed”, it could adversely impact both competition and innovation in the BNPL industry, and the ability of those who need credit to access it.

The FCA’s Review marks an important step forward in the regulation of BNPL companies and how it deals with fintech. It also carries significance for the credit market industry in general; for example, in order to produce a sustainable credit market, the Review suggests that more alternatives are needed to high cost credit, such as credit unions and community lenders. It will be interesting to see what happens to the credit industry in general, and the BNPL industry in particular, in the future.



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