Simplicity lies at the heart of the appeal of buy now pay later. Why pay in one hit when, by ticking a few boxes, you can have manageable monthly installments at zero interest? And instead of the time consuming process of applying for a regulated consumer finance product, you can speed through checkout by using unregulated BNPL.
It is no surprise that without the due diligence ‘friction’ that comes with traditional credit arrangements, merchants have found BNPL to be a powerful tool in getting sales over the line.
Such simplicity has helped propel the UK sector from small beginnings to US$27.3 billion in 2022 and a projected US$55.1 billion by 2028.
That meteoric expansion, however, is now in some doubt as a result of proposed government regulation.
A small but growing percentage of users who have been unable to manage their BNPL commitments, plus its disproportionate popularity with the under 30s, has prompted HM Treasury to table a range of changes to the status quo.
Key to these is the plan for BNPL to lose its largely unregulated status.
Up to now, firms providing interest-free delayed payment benefit from an exemption found under Article 60F of the Financial Services & Markets Act, which exempts them from regulation agreements where no interest is charged and there are 12 or fewer installments. The 60F exemption has meant that not only do they not need to be FCA authorised, but also that they have not needed to provide consumer agreements strictly in line with the Consumer Credit Act.
As they stand, the government’s proposals will do away with this exemption and require BNPL operators to be authorised and their credit agreements fall within the scope of Consumer Credit Act, as used in traditional credit agreements for unsecured loans or credit cards. Instead of minimal checks, BNPL lenders will have to undertake mandatory affordability assessments, and additionally be subject to ‘lender liability’ under section 75 of the CCA.
Unsurprisingly, BNPL firms fear that the changes are not fit-for-purpose and may have unintended consequences.
They see the loss of their unregulated status leading to disproportionate friction for consumers seeking short-term credit. If someone currently uses buy-now pay-later at an online checkout, they say, they can be expected to complete the purchase in a minute and a half, versus 30 seconds for credit cards. Based on this Klarna modeling, the timeframe could expand to five minutes under the new UK rules.
The danger is that this will reduce the appeal of BNPL. By adding extra layers to the application process, BNPL’s USP over other forms of finance will disappear.
It is argued that this problem is made worse by the fact that the new rules will not be applied to merchants, only to third-party providers of finance. Merchants will be able to offer short-term, interest-free credit directly to consumers in the largely unregulated space that BNPL has been operating in so far.
Although lenders will be able to leverage on-boarding technology, such as that provided by LendingMetrics, to speed screening and reduce point-of-sale friction to a minimum, it is still going to be challenging to beat relatively friction-free and unregulated direct merchant provision.
The concern for BNPL operators is that an uneven playing field is being opened up. A host of big names such as PayPal, Apple and Google, who have already announced their intention to ramp up their presence in consumer finance, will be gifted an unfair advantage.
Some have even suggested that the double hit on BNPL – more friction and a new uneven playing field – will lead to operators withdrawing from the market altogether.
Given that the UK will be one of only a few countries heavily regulating this area of finance, multinational BNPL fintechs might choose to focus their efforts on jurisdictions less prone to ‘over regulation’. This could be particularly tempting for them because the looming changes are going to allow consumers to use the Financial Ombudsman Service and, potentially, game the mis-selling process.
The consultation period for the government’s proposals ended in April this year, but legislation is not expected to be presented to Parliament until mid 2024 at the earliest. From the number of enquiries LendingMetrics is now receiving from this sector, it seems at least some have decided regulated BNPL still has growth potential. They are sensibly making the most of this time to prepare their back offices for the new regime.
David Wylie is Commercial Director of LendingMetrics