Klarna, Clearpay, Zilch and Laybuy are all payments companies that you have undoubtedly come across recently when making an online purchase and whose business model all operate under the same notion of Buy Now Pay Later (BNPL). In September 2020, the Financial Conduct Authority (FCA) asked Christopher Woolard CBE, its former interim Chief Executive, to chair a review into the BNPL industry, which is currently exempt from regulatory oversight.
The review ultimately set out recommendations to the FCA and the government that BNPL products should be brought under FCA regulation as soon as possible. The emergence of these products, while offering the consumer an alternative and perhaps useful form of credit, may also come with the possibility of consumer harm. Just last week, the Treasury announced that interest-free BNPL agreements would fall under the supervision of the FCA. While those within financial services may view this announcement positively, the consumer might not fully understand how this will impact them moving forward. So, what will the forthcoming regulation mean for the consumer?
What is Buy Now Pay Later (BNPL)?
Simply put, BNPL agreements form part of the unsecured credit market. They charge no interest or late fees on a purchase and offer the flexibility of following a structured payment schedule over 2 months or less. The consumer will make an initial payment when purchasing an item, spread the cost of the purchase over several arranged payments, and the BNPL company will pay the retailer upfront directly.
On the face of it, this offers the consumer simplicity and control over their finances when making a purchase. However, as the advent of the pandemic drove online shopping, the volume of BNPL online transactions tripled, and there are concerns that without regulation, people could find themselves in irreversible debt which will only place a burden on the UK’s already daunting debt pile. As Martin Lewis, the founder of MoneySavingExpert.com correctly points out, undertaking a BNPL agreement is ultimately debt, and shouldn’t be misconstrued as something that holds no consequence.
While BNPL is perhaps not as sinister as payday lending, without regulatory oversight it could spiral out of control and place many innocent consumers, mostly younger when considering the demographic that utilizes BNPL, into an unmanageable situation.
What will the regulation mean for the consumer?
Essentially, regulation of BNPL firms will ensure fair treatment and financial protection for the consumer. Consumers are currently able to enter into a number of BNPL agreements with various firms which is a predictable recipe for financial disaster. It is quite a damning indictment that more than one in ten customers of a major bank using BNPL were already in arrears. Under the proposed regulations, affordability checks will now be required. For those consumers who are financially insecure and struggling with payments, a credit check will offer these consumers protection from worsening their financial circumstances.
Regulation will also lend a voice to the consumer in that those consumers who have valid problems with a BNPL transaction will be allowed to lay a complaint with the Financial Ombudsman Service. Further transparency will also be offered to consumers when making a purchase to ensure they fully comprehend what late fees they will suffer should they fail to make a payment, and how this will have an adverse effect on their credit rating, should they fail to make a payment on time.
It is worth noting that the suggested regulatory changes may not come into effect for quite some time. The legislative process can be lengthy and there will certainly be several bureaucratic hurdles to overcome before the regulation takes effect. The response will of course need to be proportionate but is welcomed by the financial services community.