Buy Now, Pay Later has been a hot topic over the past few months, with usage of the payment method quadrupling in the UK last year alone.
Recent figures from Worldpay show that BNPL is the fastest-growing online payment method, and 5 million people are estimated to have used the option to make purchases since the start of the pandemic last year.
The increased popularity of BNPL can be attributed to several factors. For one, BNPL allows consumers to stagger payments across weeks or months, providing a more affordable option for many, especially during the pandemic when many jobs were at risk and one in six homeowners used payment deferrals (or "mortgage holidays") to ease financial pressure in the first lockdown.
Prior to the pandemic, the travel industry in particular massively benefitted from consumers' abilities to spread the cost of holidays, and is expected to see increased usage in 2021 as travel restrictions are eased. Travelers are able to use BNPL to book trips early, when prices are typically lower, and repay in monthly instalments, offering a more flexible payment option. Another highly appealing factor of BNPL is that many firms, such as online shopping giant Klarna, offer the service interest-free, making the service cheaper to other forms of credit, which can have varied interest rates.
There's not always gold at the end of the interest-free repayment rainbow, however, and this quarter we saw the BNPL model face scrutiny as the Financial Conduct Authority warned that billions of pounds were being lent in unregulated transactions, putting many customers at a greater risk of getting into financial difficulty.
In a review of the unsecured credit market led by Christopher Woolard, the potential harms of BNPL services were brought into the spotlight, and this led to the Government deciding to bring the service into regulation by the FCA in an attempt to mitigate these risks. The Woolard Review found that it would be easy for shoppers to accrue thousands of pounds worth of debt by taking out multiple agreements with different providers, and the majority of this debt would be invisible to credit reference agencies and mainstream lenders. This creates a risk that consumers can end up taking on unaffordable levels of debt with less protection in place than regular loans.
“Changes are urgently needed to bring BNPL into regulation to protect consumers, to ensure that there is secure provision of debt advice to help all those who may need it, and to maintain a sustained regulatory response to the pandemic”
- Christopher Woolard
The rapid rise and ease of use of BNPL has resulted in consumers being less informed about the service, with many not realising that they were taking out credit agreements that could result in late payment fees. One bank showed that 10% of customers who used BNPL had already ended up in arrears. One of the key issues with the service is that consumers are not subjected to credit or affordability checks, like they would be with other forms of lending, and the payment deferral method simply appears as another payment option upon checkout. The Woolard Review, then, proposed that BNPL products become subject to FCA credit rules, such as providers having to carry out a credit check or affordability test when customers opt to use the service.
As a reaction to the review, the Government pledged to introduce the legislation necessary to bring BNPL products under FCA regulation as a matter of priority. Economic Secretary to the Treasure John Glen said they would be bringing in 'the same protections you'd expect with other loans'.
The Governments' swift response to the review could indicate a desire to get ahead of the game and prevent the UK falling into the same disarray as has already been seen in Australia, where BNPL has been booming with platforms like Afterpay and Zip Money reaping the rewards. Debt helplines down under have seen a huge rise in people accumulating significant debt on BNPL platforms, and prioritising these repayments over other essential items or loans because of fears of being restricted from using the apps.
Unlike in the UK, however, Australian regulator the Australian Securities and Investments Commission is struggling to take similar regulatory action to that suggested in the Woolard review. It would seem that BNPL in Australia has found a loophole in the system, with products falling outside of ASIC's remit due to the law that requires a fee to be charged to consumers for their credit to qualify as a loan. BNPL fees are paid by merchants so not regulated as loans, leaving Australians unprotected when they fall into financial hardship from the payment deferral method. According to ASIC, many consumers are now struggling to keep up with repayments and cutting back on necessities such as food.
It could be said, then, that the UK has learnt a hard lesson from their counterparts overseas and aims to clamp down on the practice before the industry ends up in a similar situation. The proposed legislation was largely received well, however payments companies claim to be surprised by the concerns. Klarna, one of the largest online shopping payment deferral options, saw 100% growth year-on-year in the UK but has recently been compared to predatory payday lender Wonga. The lender was notorious for extremely high interest rates, and faced intense scrutiny after a surge of compensation claims, going into administration in 2018 as a result.
Klarna CEO Sebastian Siemiatkowsk said he was upset when his company was compared to Wonga: 'Klarna is very different. We've been fighting the bank establishment for years. I'm surprised to see that there's not a more positive response'. But with the industry still picking up the pieces from the payday loans crackdown, it's no surprise that people are skeptical about payment methods that seem too good to be true.
What happens next, then, will depend on how soon the Government can move to regulate the BNPL industry, and with lawyers suggesting it could be more than a year before rules are in place, it could be a long road ahead.