BNPL: Buying now, but who ‘pays’ later?

Buy-Now-Pay-Later (BNPL) is a payment option that has increased in popularity over the last few years. In the 2021 Woolard Review, the FCA outlined a number of potential harms that the unregulated BNPL market presents to consumers, stating that the unregulated BNPL market “needs to be brought within regulation to both protect consumers and ensure it is sustainable”. This blog explores the growth, potential consumer harms, and the regulatory horizon of BNPL

What is BNPL?

BNPL offers shoppers the choice to pay for their goods in a series of instalments without being charged interest. Retailers offering these products benefit through an increase in sales from customers that would perhaps hesitate to purchase the goods if they had to do so outright, and firms offering BNPL are able to profit from a percentage of the sales they facilitate. For customers, BNPL has a number of benefits too. It can be an easy way to access credit and it is more cost effective than other available regulated credit options. For example, as customers struggle with the cost of living, the option to defer payments over a more manageable repayment schedule may look like an attractive option

While traditionally BNPL was associated with online fashion retailers, there are now firms offering this option for essentials such as grocery shopping, car repairs, homeware, and household electricals. There are also now Eat-Now-Pay-Later options that allow customers to order takeaways without paying the cost of the meal upfront. New data from the Centre for Financial Capability has shown that demand for BNPL has increased across all age groups.

What are the potential customer harms?

In November 2022, it was reported by The Independent that 1 in 6 Brits has no savings. A report by The Centre for Financial Capability states that almost 25% of adults who had used BNPL services in the UK had failed to pay their instalments on time, with this number rising to 35% for those between 18 and 34 years old. Statistics such as these are indicative of the current and potential scale of harm within this currently unregulated market, particularly where customers might have vulnerabilities.

As more financial service providers enter this market,  worth just short of £10billion in the UK, and with mainstream banks beginning to compete with BNPL fintechs that have facilitated the growth of the product, there are now more options available to customers at the click of a mouse. Unlike banks and credit card companies, offering BNPL does not require a firm to be FCA authorised or to undertake processes required by other regulated sectors, such as checking a customer’s credit history. A 2021 Barclays survey of 2,000 UK customers found that “52 per cent [of those surveyed] are unaware that unregulated BNPL providers don’t have to carry out robust affordability checks”. Without this, regulated lenders might not have a full view of a customer’s financial capability to repay or have the information needed to understand a customer’s ability to meet their obligation under any existing BNPL plans or any new proposed lending.

This can also mean that customers may be worsening their financial position. The Woolard review outlined that paying for more expensive products using BNPL “could increase average transaction values and therefore outstanding balances” and, due to the variety of options in the market, “a number of consumer research participants explained that if they are rejected or reached their limit with one provider, they look to use an alternative one.” Spotlighted as an interest-free, fee-less way to buy goods, there is the danger that some customers will come to rely on BNPL without being fully aware of the risk that comes with missing payments. BNPL firms often charge late payment fees and can refer missed payments to credit agencies and debt collection agencies. In the Centre for Financial Capability’s annual survey of BNPL, it was found the percentage of respondents who’d been affected by late payment fees had increased from 2021 to 2022.

Where might this lead? People being able to buy more than they can reasonably afford, possibly using multiple BNPL providers at the same time, and even being accepted by BNPL firms when they are already unable to meet existing commitments.

A Regulatory View

The Woolard Review recommended that BNPL should be brought within the scope of FCA regulation. The Government is acting with the FCA to bring BNPL and other short-term interest-free credit into regulation under the Consumer Credit Act (CCA), meaning that BNPL providers would have to carry out their business activity in accordance with regulatory rules and guidance, as outlined in the consumer credit sourcebook.

Research from Barclays Partner Finance found that “Gen Z consumers (18-24-year-olds) are disproportionately impacted by the pitfalls associated with unregulated buy now, pay later (BNPL) products”. There is a connection to advertising and social media. For example, in December 2021 the UK Advertising Standards Authority banned advertisements that “irresponsibly encouraged the use of credit to improve people’s mood” and the FCA issued a Dear CEO letter in August 2022 to firms offering BNPL warning them about misleading advertisements. This set out key messaging that firms offering BNPL should include fair warnings about the risks to customers in their advertising.

The FCA also warned that BNPL providers need to ensure that their consumer contracts comply with all requirements of consumer protection legislation, such as the Consumer Rights Act 2015 (CRA) and the Unfair Terms in Consumer Contracts Regulations. In an investigation in February 2022, the FCA identified potential harm to customers arising with respect to the contract terms at four large BNPL firms. As a result, the BNPL providers in questions agreed to change terms in their consumer contracts to make them fairer, easier for consumers to understand, and better reflecting of how they use them in practice.

In October 2021, the Government published the Regulation of Buy-Now Pay-Later Consultation, which set out policy options to achieve a proportionate approach to the regulation of BNPL. Secondary legislation is due to be laid out by mid-2023, after which point the FCA will consult on its rules for the sector.

Summary

Although there is still uncertainty around the regulation of BNPL, the June 2022 response to the Government’s consultation provides some insight into what the BNPL firms in scope may expect:

• The CCA requirements relating to the treatment of customers in financial difficulty to apply to BNPL. Regulated firms are required to treat their customers fairly and with forbearance and due consideration of the individual circumstances of each borrower;
• The FCA's rules on creditworthiness assessments to apply to BNPL, with BNPL borrowing potentially appearing on credit files;
•  Customer protections from misleading advertising to be further strengthened by bringing BNPL within the financial promotions regime;
• When regulated, BNPL customers will have the right to make complaints to the Financial Ombudsman Service (FOS); and
• Regulation and the required FCA authorisation will bring BNPL into the scope of the Consumer Duty, requiring a higher level of customer understanding and the need to evidence that customers are achieving good outcomes.

Becoming regulated presents challenges to firms who have not previously been regulated. In other sectors, this has typically involved the strengthening of governance, risk, compliance, and business procedures to evidence adherence to regulation. In addition, with a potentially more rigorous application process to obtain BNPL and the risk of it damaging credit scores, fewer customers may choose this option. As the regulatory spotlight turns to this sector, firms in scope should focus on how they provide good outcomes to their customers and how they evidence this.