Buy Now Pay Later (BNPL) firms have welcomed more scrutiny by regulators amid concern over young shoppers’ debt but some argue the clampdown could significantly dent UK sales in the sector.
A review published by the Financial Conduct Authority (FCA), which regulates financial services firms and markets in Britain, concluded the FCA should regulate the BNPL industry “as a matter of urgency” as there was “significant potential for consumer harm”.
The BNPL market- in which consumers typically split payments into several interest-free payments-has been booming of late in the UK.
BNPL market booming
Figures show the market nearly quadrupled to £2.7 billion during 2020 and five million people had used BNPL services from since the start of the pandemic. However, critics say the BNPL market traps customers into spending money they don’t have and that companies, which use sexy social media stars to advertise their products, glamorise debt.
Under the proposals, BNPL companies, whose services are used by ASOS, M&S and Boohoo, must carry out hard credit checks and affordability tests when customers choose to defer payments. BNPL customers will also be able to escalate complaints to the UK’s financial ombudsman.
BNPL firms respond to FCA ruling
Leading BNPL firms like Klarna, Afterpay (which operates as Clearpay in the UK) and Laybuy have welcomed the proposals, but some firms have expressed concern about how the rules will be implemented.
Gary Rohloff, the co-founder of New Zealand founded Laybuy said the review “highlights the benefits of the sector and it also focuses on ensuring the entire industry works in the interests of customers.
“Debt per se is not a bad thing,” says Rohloff, as long as it’s offered in a responsible manner, he continued.
Rules will not materially impact Laybuy in UK
Rohloff said tighter rules will not materially impact Laybuy’s business in the UK.
“The review and recommendations are not something that will materially affect our business because we are doing what the regulator is proposing the industry does anyway,” Rohloff added.
London-based Zilch, which unlike some rival BNPL firms doesn’t require merchant integration and can be used in any store that accepts MasterCard, has already been granted consumer credit authorisation from the FCA.
Zilch founder and CEO Philip Belamant said the new recommendations have the “potential” to have a positive or negative impact on the industry, depending on how the rules are implemented.
Belamant said: “On the positive side, there is certainly something to be said around the regulation of integrated point of sale finance at the checkout.”
Concern about how credit checks implemented
But Belamant expressed concerns about how the regulation might be implemented, cautioning against an older approach as to how customer affordability is worked out.
“A potential downside may be that if the regulator takes an older approach to how they regulate. For me, I am specifically talking about how one should assess the affordability of the customer.
“What we wouldn’t want to see certainly is a 10 –year-old approach to the assessment of affordability. Because what that will do is it will disqualify a lot of young customers in this process which flies in the face of the point of this type of lending which is really democratising access to free credit.”
Damian Kassabgi, EVP, public policy, Clearpay, said he welcomed the recommendations.
‘It has always been Clearpay’s view that consumers will be best served by products designed with strong safeguards and appropriate industry regulation with oversight from the FCA.”
Merchant fees versus consumer charges
Kassabgi pointed to Clearpay’s point of difference to its rivals.
He added: “Unlike a lot of other Buy Now Pay Later firms, we specifically are in the business of providing an instalment service for consumers that is free and that is very short term. The business model here is making revenue from merchants, not customers.
“Even Klarna still relies on about 60 to 70 per cent of its revenue coming from consumer fees, charges and interest. For us, 80 to 85 per cent of our revenues come from the merchant fees.”
Klarna also said it also welcomed the oversight.
“We agree that regulation has not kept pace with new products and changes in consumer behaviour and it is now essential that regulation is modern, proportionate and fit for purpose, reflecting both the digital nature of transactions and evolving consumer preferences,” a Klarna spokesperson told CNBC.
Some critics of the BNPL industry claim that unless regulated the industry was heading for another Wonga-style scandal, referring to the payday lender that went bust in 2018.
Labour MP John Spellar said: “These companies make it easier to overspend online because the costs appear lower as they are spread out- yet with furloughing and redundancies growing what seems affordable in one month may not be in the next.”
Some campaigners have now welcomed the changes. Alice Tapper, a financial campaigner who has pushed for regulation of the BNPL sector, said she was “delighted” at news of the regulation.
“Regulation means consumers will receive the information and protection they deserve. The FCA and government now need to act fast to bring these recommendations into fruition.”
Yet others argue the proposed new rules could undermine the sector’s sales, with finance blogger Iona Bain said: “BNPL allows the fantasy to happen for shoppers by giving them an easy way to defer the real cost, as well as promising an easier life for serial returners who over-order clothes online.
“But the fantasy disappears as soon as the credit provider is required to ask lots of rigorous questions about your income, your job status and your borrowing history- if this is what an affordability assessment will look like, and anything less would surely be ineffective?
“This puts a big obstacle in the way. Carts will be abandoned left right and centre as shoppers wake up to the commitment that is talking out credit. What they might have once thought of as a cost-free magic wand suddenly becomes an onerous headache.”
BNPL sales boom
In the UK, BNPL firms have seen a boom in sales during coronavirus- and don’t expect sales to dampen amid the shift to e-commerce spending.
For instance, Klarna, which raised $850m (£619m) last year, said it has added more than 35,000 new retailers during the first half of 2020 to its network of more than 200,000 retail partners. It said volumes and revenues had grown 44 per cent and 36 per cent year-on-year to more than $22m (£17.1m) and $466m (£361m) respectively.
Likewise, Laybuy customers have splurged NZ$508m (£238m) through its platform in the year ending September 2020 as it boasted a 48 per cent jump in the number of active merchants.
Laybuy, which launched in the UK in 2019 and is listed on the Australian Stock Exchange, now has over 500,000 customers globally.
In the UK, it has 20 staff, over 1,500 merchant and over 250,000 customers, which has surged during coronavirus.
On the UK market, Calum Mackay, head of marketing, Laybuy says: “I would say from a UK perspective we are a couple of years behind Australia in the BNPL journey.”
Zilch, meanwhile, which completed a $30m (£22m) funding round last year, also saw customer registrations jump significantly during lockdown. With around 60 staff in the UK, the company has just reached the 150,000-customer mark in the UK, growing by nearly 60,000 customers a month.
Delay before FCA rules come in
Despite the FCA review calling for urgent action, there is no date set for regulation. According to The Financial Times, BNPL firms have indicated it could take time to create the required procedures.
For example, Klarna told the newspaper that credit reference agencies, which amass credit data from banks and other credit providers, don’t have the necessary technology for BNPL firms to share data on their products.
But once the rules do come in, it remains to be seen the impact it will have on the booming BNPL industry.