What is Buy Now Pay Later- and is it regulated?

The Buy Now Pay Later industry has exploded in recent years, accelerated by the jump towards online purchasing throughout lockdowns. But as consumers swap from credit card to BNPL provider, how can they stay protected against questionable practices?

What is Buy Now Pay Later?

Buy Now Pay Later (BNPL) is a method of consumer financing. Members of the public can access interest-free, short-term loans in order to pay for everyday items, such as clothing. They are then required to pay back the total amount in BNPL payments as instalments over time.

Some of the biggest BNPL schemes in the industry include:

• Klarna
• Clearpay
• Openpay
• Laybuy

The BNPL product is an incredibly popular form of alternative credit, especially among young people. In fact, the 18-24 year old age group are its biggest fans, averaging a  spend of $250 per month through the service.

There are several key reasons why the service is so popular (with some of these actually leading to the call around increased regulation, too). 

Credit checks

Firstly, there are no credit checks associated with the loans for BNPL users. 

With traditional loans, both soft and hard credit checks are required by the lender in order to evaluate the credit history of a person, and their likelihood to pay back the loan. Typically, those with better credit history gain access to more favourable lending conditions, such as better interest rates. 

However, with the lack of regulation around BNPL services, no credit check is required. While this opens up the service to those who would not be able to otherwise access it, it can become harmful. In some cases, BNPL loans can create levels of debt that individuals struggle to repay. Of course, this then affects other aspects, such as overall quality of life.

Frictionless

Secondly, the application for this technology is incredibly frictionless, meaning that accessibility is much easier than other types of loans.

For example, leading company Klarna does not have a minimum credit score requirement in order to sign up. Traditional lenders are likely to look at this factor, as well as credit utilisation, number of lines of credit and history of repayment, making it harder to qualify. 

The lack of friction is a clear reason for the popularity of buy now pay later services. But it does cause some concern for experts around making the fine print easy to miss when accepting the BNPL agreement. Consumers may not know exactly what they are signing up for.

Advertising

Finally, every BNPL firm fails to face any of the usual restrictions on advertising financial products, and are not required to disclosure any standard information. Since the service does not officially fall under “banks and financial institutions”, it is much harder to impose the same banking regulation around advertising. 

Recently, some BNPL companies have come under fire from the advertising standards agency around their irresponsible advertising practices. However, there is still more to be done in order to impose a clear framework around what is and what is not acceptable language. 

When talking about BNPL, there should be a lack of confusion and misunderstanding to match with the rest of the financial services industry. 

Concerns associated with BNPL

With the rise of any sort of new financial technology, the issues begin to appear fairly soon after adoption. The major concern is the total lack of regulation around this product since it does not fit into any pre-existing compliance checks or frameworks. This means that it is harder to apply blanket measures across the industry. 

Moreover, environmental experts have shared their concerns about the BNPL sector, since it could be seen to encourage overconsumption and consumerism. With increased access to products without the need to pay, customers get to experience instant gratification. This can have an adrenaline-like effect on the body, and become addictive.

But fast fashion is nothing new, and the industry has been targeted as one of the key contributors towards global warming, in opposition to the trend towards sustainable finance.  

Finally, the individual risk associated with BNPL services is high, since there is no credit check or financial safety net. This, in combination with the lack of friction around accessibility, means that members of the public do not know the risks. For example, what are the consequences of late payments?

Future of BNPL regulation

With a large investigation taking place in February 2022, the Financial Conduct Authority (FCA) has been working in conjunction with top buy now pay later firms in order to build regulation that protects the public and works for the companies offering these services.

Advertising

While BNPL companies are currently getting away with advertisements without restriction, this is likely to change soon. HM Treasury states that there is a need to improve consumer protection around BNPL, with a focus on transparency.

It is likely that every single promotion would have to be approved by the FCA, or financial branch of the ASA. If this were to be reflected in the US market, we would expect a similar shift towards clarity.

Customer awareness

With an option to pay using credit at almost every online checkout, there is a risk that consumers will find themselves in debt without realising it. New regulations will see a focus on contracts, with disclosures that cannot just hide in the fine print. 

Importantly, this also includes the consequences when consumers cannot afford to repay their borrowed credit. Experts have noted a huge lack of expectation around debt collectors actually showing up, which many do not realise is a real consequence of failing to repay.

Even though this creates more friction in the process, it is important in striking the balance between clarity and ease.

Credit checks

When customers default on their loans, investigators have found that BNPL firms do not treat them fairly. Alongside financial difficulty, this can lead to huge levels of stress, which is particularly difficult for vulnerable customers. 

With the introduction of credit checks, firms would be obliged to gain an insight into the likelihood of on-time repayment for every customer. While this may decrease the potential customer pool, it should enable better protection for consumers.

Consistency

As with any industry, competition between rival firms means that customer expectations can vary from one to another. But this can lead to drastically different experiences, depending on which company you borrow from.

We expect to see certain sections of the Consumer Credit Act apply to BNPL, mainly in order to regulate and standardise the treatment of consumers. Moreover, this will give customers a more accurate reflection of what to expect moving forward. 

In order to stay up to date with new financial services regulations as soon as they are announced, check out the CUBE RegAssure Platform. It’s highly flexible and ensures that your business remains sensitive to new regulatory information, as soon as it is released.