Buy Now Pay Later services are a hot topic at the moment. While providing flexible payment options to some, many in the industry are concerned that these BNPL services could cause significant financial harm to their customers, at a time where financial security is still up in the air.
Louise O’Reilly is a marketing associate at AMPLYFI, a software platform that uses AI to analyse data. Here she shares how AI analysis reveals insights into the Buy Now Pay Later space and the effect of upcoming regulatory changes.
In February 2021, the UK’s Financial Conduct Authority (FCA) announced that so-called interest-free ‘Buy Now Pay Later’ (BNPL) providers will soon come under their jurisdiction. This will mean tighter controls for providers in the space and the need to complete affordability checks on their clients. But what does this mean for the future of the BNPL space?
The industry has previously seen mass growth, with providers such as Klarna and ClearPay allowing customers to delay payments on items at a variety of online retail sites by buying immediately and ‘paying later’ either in instalments or over a 30-day window. Klarna, valued at $31 billion, is Europe’s highest-valued private fintech, with eight million customers in the UK alone. Upcoming new regulations for providers such as Klarna could bring back memories of the former UK payday loan firm Wonga. Once dubbed as ‘a platform for the future of financial services’, Wonga came under threat when the FCA ruled that their debt collection practices were unfair and ordered urgent affordability checks for customers in 2014. These changes resulted in £2.6m in compensation to 45,000 customers and preceded their collapse into administration in 2018.
Using AMPLYFI’s AI-driven insights platform, we have analysed unstructured data to reveal unique insights surrounding the BNPL space and the effects the new regulation may have. Our technology leverages machine learning and data science to deliver insights by connecting structured and unstructured data at scale to uncover previously hidden links, trends and opportunities.
In the past few years, our analysis suggests that the UK has experienced a slower than average adoption of BNPL services. UK-related data indicates a more extended growth period with a plateau not reached until mid-2019. At a global level however, the popularity of BNPL schemes climbed throughout 2018 before reaching a plateau at the end of the 2018.
Both globally and in the UK, BNPL schemes saw a stark increase in popularity from March to May 2020, with online shopping increasing at the start of the coronavirus pandemic. Their ease of access and convenience are attractive to consumers, especially when lockdown restrictions prohibit physical access to shops. Over the 2020 Christmas period alone, UK shoppers spent £2.3 billion using BNPL services, reliant on the providers over the festive season for retail goods. With heightened economic challenges from the pandemic, a growth in reliance on the services is concerning. In one of the worst economic downturns on record, financial uncertainty from widespread redundancies, and furloughing of workforces on reduced salaries may mean that users find themselves unable to ‘pay later’ and accrue large amounts of debt.
The services are particularly popular with millennials and gen-z shoppers, with 60% of BNPL users aged between 18 and 34. As an appealing short-term option, the services can act as a lifeline in times of financial hardship – but could cause longer-term unhealthy reliance on similar providers, credit cards and overdraft services. Similarly to the effects identified in Wonga’s history, these factors contribute negatively to the UK’s household debt crisis.
The recent Woolard review by the UK government found potential for harm as the popularity of BNPL products rapidly increases – with the volume of transactions tripling in 2020 as the pandemic drove up online shopping. The new FCA regulation aims to ensure all customers are treated fairly and are only offered agreements they can afford, particularly those who are vulnerable or already struggling with repayments. As seen with FCA investigations into loan firm Amigo in mid-2020, a serious issue in this space is the high-volume of customer complaints received by lending companies from individuals who believe they were wrongly approved for loans they could never afford to repay.
When Wonga introduced affordability checks as a result of the FCA’s action, it not only resulted in the writing off of debts for hundreds of thousands but the removal of interest on loans for a further 45,000 customers. For consumers, a current attraction of BNPL providers is the lack of a full credit check, chargeable fees, or interest. With new regulations and affordability checks threatening the use of BNPL providers, AMPLYFI’s analysis reveals links to these tensions when examining the connection between BNPL and the FCA.
By tracking the strength of the association between BNPL and the FCA, we can track the relationship from the first co-mention, where key events in this relationship become easily identifiable. For instance, the peak in December 2018 relates to legislation aimed at overdraft charges which had then been linked to high-interest BNPL providers. While there has long been a link between BNPL and the FCA, this analysis shows a general tightening of the relationship beginning in the second half of 2019.
Klarna is a major player in the BNPL space, both in the domestic market and abroad. A comparison between the UK’s FCA and Australia’s Securities and Investments Commission (ASIC) regulators could provide UK stakeholders an opportunity to learn from Australia’s preceding actions. Before the FCA’s announcement about 0% BNPL providers, ASIC had completed its assessment for the Australian market over two years ago. In demonstrating that the UK market was slower to adopt the BNPL model, it follows that action by the FCA has lagged.
Klarna delayed its entry into the Australian market. After regulatory investigations into the sector were carried out in the first half of 2018, Klarna broke into Australia with an August announcement of a partnership and funding from Australia’s Commonwealth Bank. The fact this happened after the ASIC investigation hinted at a favourable stance by the ASIC.
As Klarna is active in the BNPL sector within the UK, it is highly likely it will be directly affected by new FCA legislation and can draw upon its experiences in Australia. Their partners, such as the high street retailers they service, are therefore also likely to be indirectly affected by new legislation.
AMPLYFI’s analysis platform identified and quantified these second-order links by showing the strength and context of their relationships with Klarna (shown in the chart below). For instance, given the strong link between Klarna and their retail partners, such as H&M, Sephora and Nike, it is also likely that they would see negative impacts of tighter regulations.
The impact of new regulation on the BNPL space will likely go beyond just the immediate providers and have ripple effects on many retail businesses and economies. Affordability checks on clients could reduce BNPL providers’ appeal to consumers, making the services harder to access and potentially leading to severe difficulties as seen with Wonga. Until the FCA action is enacted, the new regulations’ full impact is yet to be discovered, but one certain is that the unstructured credit market will undoubtedly see a major shift.