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A major UK fintech association has described the government’s proposed regulations for buy now, pay later (BNPL) products as a “missed opportunity to improve consumer outcomes”.
In a consultation response, Innovate Finance said that although its members welcome the government’s efforts to regulate BNPL, so far they have been disappointed by the proposals on offer.
In the consultation published in February, the government said there is “relatively limited evidence of widespread consumer detriment” from BNPL, and that BNPL agreements are “inherently lower risk than the majority of other regulated credit agreements.”
Despite these assurances, however, Innovate Finance said the consensus among its members is that the government’s proposals are excessive and would disproportionately affect the sector.
“All our members are deeply concerned and consider the latest policy proposals and draft statutory instrument to be a material departure from the heavily trailed ‘tailored and proportionate’ regime for BNPL,” said Innovate Finance.
“Our members consider that the measures, in aggregate, are more onerous than those that currently apply to regulated consumer credit products with a greater risk of harm, such as credit cards.”
Elsewhere in the consultation, the government said it aims to ensure that BNPL regulation is not “overly burdensome” to firms and that it does not “significantly impact the provision of interest-free credit”.
In the eyes of Innovate Finance members, however, the government’s proposals would ensure both of these outcomes.
Where did it go wrong?
Innovate Finance’s opposition to the proposed regulation covers a range of areas, including onerous pre- and post-contractual disclosures, rules on BNPL promotions and compliance costs.
However, the most fundamental opposition to the regulation is directed towards the exemption it provides for merchants that offer purchase credit directly to consumers.
As covered by VIXIO in February, the proposed BNPL framework will apply to all credit agreements that meet the following key criteria:
- The credit agreement must be interest-free and repayable in 12 or fewer instalments over a period of 12 months or less.
- The credit must be provided by a person or entity that is not the provider of goods or services that the credit agreement finances.
In other words, merchants who offer “pay in instalments” arrangements directly to their own customers would be exempt from the regulations.
The government said it made this distinction based on the low potential for consumer detriment when credit is offered directly from merchants to consumers.
However, as Innovate Finance pointed out, this exemption would benefit large retailers and especially bigtech companies, which could offer BNPL products without the compliance obligations that a third-party credit provider would face.
“By not capturing bigtechs and large retailers within scope, the government’s policy intervention may inadvertently drive anti-competitive effects in the UK’s consumer credit market,” said Innovate Finance.
“These firms have market dominance and a substantial balance sheet with which to underwrite a high-volume of short-term, interest-free credit offerings, which no fintechs or SME retailers could match.”
Looking to Australia and New Zealand, Innovate Finance praised both jurisdictions for moving towards BNPL regulation that would include such large retailers and bigtech platforms within its scope.
Similarly, the association noted that Rohit Chopra, director of the US Consumer Financial Protection Bureau (CFPB), has warned of bigtech’s growing influence in the BNPL sector, and has said his agency is studying its impact on competition and innovation.
Apple, for example, acquired Credit Kudos in March last year in a deal said to be worth $150m.
Several months later, this was followed by Apple’s announcement that it will soon launch its own BNPL service, Apple Pay Later, which will be funded by Apple’s own balance sheet.
Given these concerns, Innovate Finance said it is “not enough” for the Treasury and other policymakers to “monitor the market for any abuse of the loophole”.
Instead, Innovate Finance wants to see these exempted entities brought within the scope of the regulation, in the same way that the EU has done through reform of its Consumer Credit Directive.
Major BNPL providers such as Block, owner of Afterpay, have voiced similar concerns. Speaking at the Innovate Finance Global Summit in London last month, Michael Saadat, head of global international public policy at Block, said that products that “look quite similar and work in similar ways” ought to be regulated as such.
“We know there are some very large retailers and very large tech businesses that have the capacity to offer BNPL services to their customers directly, and we just don’t think it makes sense to exclude those from the scope of regulation,” he said.
“We think it’s really important having a level playing field when it comes to BNPL regulation.”
Other issues
Although supportive of the government’s efforts to impose uniform disclosure requirements on BNPL agreements, Innovate Finance said that current proposals would add unnecessary friction to BNPL purchases.
Under the proposals, BNPL firms must apply the full Consumer Credit (Agreements) Regulations 2010 to purchases, as well as the documentary requirements outlined in the Consumer Credit Act 1974.
These include signatures, provision of copy documents, right of withdrawal and other requirements.
According to Innovate Finance, these measures “do not reflect the digital channels through which consumers enter into BNPL agreements and do not align well with the short-term, interest-free nature of BNPL products”.
Innovate Finance also referred to research conducted by consumer watchdogs Fairer Finance and Which?, which found that consumers find pre-contractual and contractual information “inaccessible” and many “do not engage with it at all”.
Alex Marsh, head of Klarna UK, said the disclosure proposals would significantly lengthen the time it takes to make a BNPL purchase.
Comparing BNPL to credit card purchases, Marsh said it currently takes about a minute and a half to make a BNPL purchase, compared with 30 seconds using a credit card.
But under the proposed regulations, Marsh estimated that it could take up to five minutes for consumers to complete a single BNPL transaction.
