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Under the new government plan, UK firms will be required to ensure loans are affordable and rules will be amended to ensure advertisements are not misleading, but some concerns remain among industry experts.
Buy now, pay later (BNPL) has been one of the stand-out new payment trends during the pandemic in the UK and other countries, such as Australia, Sweden and Germany.
Although convenient to consumers looking for a frictionless purchase, it has garnered concern from the third sector, including the likes of consumer organisations Citizens Advice and Which?, as well as members of parliament, such as Labour’s Stella Creasy.
HM Treasury has now published plans to regulate the burgeoning sector. This comes after a public consultation and the Woolard Review in 2020.
“It’s good to see that the Treasury and Financial Conduct Authority are moving in the right direction on the regulation of the BNPL sector,” said Jayadeep Nair, chief product officer at Equifax.
In particular, Equifax agrees with the government’s view that clear, consistent and timely credit reporting across the three main credit reference agencies will be an important part of the responsible provision of BNPL products, he continued. “This level of transparency will help to bring hidden lending into the light, and ensure that all consumers who use BNPL get the same benefits and the same level of protection.”
“We’re already working with many BNPL providers to get this data included on credit reports, and hope that others will now step forward to collaborate with us on this too.”
It is about time that we had regulation like this for BNPL, agreed Gary Prince, vice chair of SimplyPayMe. “Regulators do like to take their time, and we've seen people like Martin Lewis [the consumer rights advocate] concerned that it will be too little, too late, with people taking on debt they can't afford."
Prince told VIXIO that from a consumer protection point of view, this levels things up.
“One of the frustrations that banks and other players have had is that BNPL players didn't have the affordability checks,” he said.
“BNPL has been all about user experience, and getting customers signed up as soon as possible. This has taken paramount over other issues like additional checks.”
In that instance, sign-up processes could become far longer. “Interestingly, when combining BNPL process with open banking and doing real-time affordability checks, things can be done, but processes will need to change."
Yet, this extra burden is not just an issue for BNPL providers now, it has been suggested.
Even the government admits that the proposed legislation is broader than it envisaged, said Simon Deane-Johns, consultant solicitor at Keystone Law. “They had in mind continuing to exempt the more traditional forms of store credit for larger items. Yet, the government have decided to include what it says are the majority of those types of purchases, even if it is unclear exactly what goods might be affected.
"It seems to be going for larger purchases as well as the smaller ones where the BNPL explosion has happened,” he pointed out.
“People have always bought larger items, such as a sofa, through instalments. Yet, now the government is saying that more traditional forms of credit should be in scope where an item is bought online."
The government’s proposals come at a time when plenty of different actors are trying to enter this fast-growing market. NatWest has said that it will introduce a new BNPL product, while Apple made headlines a few weeks ago with an announcement of its own, albeit initially focused on the US market.
Revolut has also begun to roll out its own Pay Later product across Europe, starting with Ireland, while stressing that it is a “responsible” lender.
According to reports, Revolut has said that it will be the first BNPL product in Ireland that uses an approved credit limit and with consideration for affordability.
Revolut has also been careful to emphasise that its BNPL offering will fall in line with Ireland’s new consumer credit rules.
How the payments ecosystem will be affected by the UK’s proposals, particular among current BNPL providers, remains to be seen.
Klarna has previously said that it welcomes the prospect of regulation providing it is proportionate.
Responding to the Treasury’s announcement of a consultation on BNPL regulation in November, Klarna said: “At Klarna we believe that regulation is a good thing, and we continuously set the standard for the sector in the best interest of consumers.
“However, there are still bad products and providers out there, so we are pleased to see that the regulation of BNPL is now underway. Ultimately, this will drive consistency and improve outcomes for all consumers.”
However, are BNPL firms likely to be winners or losers under the proposed new rules?
"Merchants who currently offer their own finance could decide to outsource all this to a third party, assuming the cost of that can be priced into the items,” said Deane-Johns. “Again, ironically, that would be a revenue opportunity for BNPL finance providers."
Yet, Prince said you need only look elsewhere to see a different story for once-thriving BNPL firms.
“Look at the fallout in Australia, we're seeing BNPL firms' value reducing to zero now consumer protection rules are being introduced.”
Both Zip and Sezzle have reported massive losses in recent earning reports, while Australia’s Commonwealth Bank is believed to have lost out from its 2019 investment into Klarna.
"This is payday loans part two, and certainly a challenging business model with added costs for BNPL players,” said Prince.
The issue is that credit is credit, he said. “If the business model is no longer viable, was there a business model in the first place? What has happened here is easy money, where people can spread the load. We're now heading into the perfect storm with the cost of living and inflation.”
