Change ahead for Buy Now, Pay Later

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Success story or dangerous trap?

BNPL is a type of embedded payment solution that lets customers pay for something on a deferred or more flexible basis. Instead of a single upfront payment, customers might make multiple payments over weeks or months, usually with no interest – assuming they repay all on time. This could cover anything from a new phone to some clothes or a holiday!

BNPL can operate in a variety of ways. Often, the customer is incentivized to make a purchase, perhaps one they wouldn’t usually make. As a result, the merchant benefits from an additional sale. The BNPL provider is then responsible for repayment arrangements, taking certain risks away from the merchant. Merchants can also offer a more direct form of BNPL, without an additional party, if they wish to.

It’s a booming industry, with many merchants and global brands now offering BNPL as an option at checkout. In an increasingly competitive financial services market, it’s an embedded finance success story, and an important alternative to traditional forms of credit.

Here’s the issue: according to a new study, “UK shoppers have racked up more than £4bn in outstanding debt so far this year after taking advantage of BNPL deals during the pandemic”. For some time, regulators and politicians have expressed concerns about how easy it is for consumers to spend more than they can afford, and to build debts.

Some of the concerns flagged in the Financial Conduct Authority’s Woolard Review earlier this year include:

  • Customers not perceiving BNPL to be a form of credit
  • Increase of merchant sales vs. lack of affordability assessment for BNPL transactions in some situations
  • Whether the Consumer Credit Regime and current exemptions were suitable for the BNPL market

Tighter regulation on the horizon

As a result, HM Treasury is consulting on how the BNPL industry should be regulated. The aim is to do so in a way that enhances customer understanding of BNPL models, without stifling innovation. Some key proposals include:

  • FCA rules and supervisory powers over lenders in the space
  • Requirements to carry on pre-contractual screening and disclosure requirements and perform customer affordability or creditworthiness assessments
  • Oversight of BNPL advertising and promotion via the UK’s Financial Promotion Regime
  • Roll-out of rules on arrears, default and treatment of customers in financial difficulty
  • Enhancing consumer protections to claim against BNPL providers in certain situations

The consultation is open for response until January 2022. HM Treasury will then publish a summary of responses and a roadmap on next steps of intended BNPL regulation.

What this means for merchants and BNPL providers

Carrying on a regulated activity (many of which are related to consumer credit) by way of business in the UK without appropriate FCA permission is a criminal offence. Whether you’re a user or provider, it’s therefore essential that you understand how BNPL interacts with the UK’s Consumer Credit Regime.

While many forms of “interest free” BNPL models may currently benefit from existing exclusions to the CCR, this is likely to change under proposals in the HM Treasury consultation. Providing a “lending” service could also move a business into scope of other regulation – the UK’s Anti-Money Laundering Regime, for example.

In short, it’s important that you stay up to date with the latest developments. Our team has experience advising a range of clients on embedded finance propositions, and can help you navigate the complex and changing regulatory environment.

For an initial chat, just drop us a line.