Buy Now Pay Later – preparing for a regulated market
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In this, the first of two articles, Faye Sadler-Clark, Director of Risk & Compliance, and Michelle Sharples, Head of Digital Risk & Compliance Solutions, examine how Fintech organisations are preparing for newly introduced regulations surrounding Buy Now Pay Later.
Buy Now Pay Later is a financial product that allows consumers to purchase goods on credit and typically pay for them through regular, interest-free instalments for up to 30 days after purchase, or 6-week to 4-month instalments. This is a common payment method with online retailers, and is becoming increasingly popular at high street shops, and indeed around the world (Global statistics and facts)
Buy Now Pay Later (BNPL) is the fastest growing payment method in the UK, with nearly 4 in 10 Britons saying they have used a BNPL service, and its use is growing at rate of 39% per year. With nearly 10m Britons saying they have avoided retailers who don’t offer BNPL, there is a pull from consumers, and therefore pressure on retailers, to provide this as a payment method. The original innovators, such as Klarna, Clearpay and Laybuy, have seen their market share increase. If we look at Klarna as an example, their market share in the UK (5%) is above that of the US (2%), but less than Germany (20%) and Australia (11%). We are now starting to see regulated FS organisations launch BNPL products (Revolut) or substitute products (VISA).
The typical process for accessing BNPL for customers has few barriers, and is seen at the lowest friction approach to obtaining short-term credit.
This frictionless credit journey does not present itself to consumers without risks. A recent survey revealed that 24% of BNPL customers spent more than they planned because BNPL was available at the checkout, whilst they can access multiple BNPL offers from various fintechs, rendering credit limits with individual fintechs meaningless. The risk to consumers of finding themselves in a position of financial difficulty, especially those consumers who are vulnerable, is real and present.
The Woolard review and likely regulatory impact
Buy Now Pay Later is not currently directly regulated, relying on an exemption under the Financial Services and Markets Act 2000. However, as a result of the Woolard Review, recent work by the FCA, and pressure from various consumer groups, BNPL will be brought under the FCA regulatory perimeter. For BNPL firms this means they will have to:
- Undertake affordability checks
- Implement effective redress mechanisms, and consumers will have a right to complain to the Financial Ombudsman Service (FOS)
- Evidence operationally robust processing, sustainable financing and have a wind down plan in place
Various new processes such as affordability tracking will be needed, all requiring full employee training to help ensure compliance with new requirements. Whilst the exact regulatory details have yet to be confirmed, the FCA’s guide to other areas of consumer credit can be a useful indicator of what to expect, and there are some key things BNPL fintechs will be thinking about in advance:
- Whilst fintechs such as Klarna already undertake “soft” credit checks, it will become their responsibility to ensure that these affordability assessments are as accurate and robust as possible.
- Fintechs will need to put in place robust measures to monitor affordability on an ongoing basis for repeat customers. The FCA have previously highlighted poor re-lending practices in other areas of consumer credit, criticising organisations that rely on historical information or prepopulated application forms, so it's unlikely that these practices will be allowed.
- Part of assessing affordability means identifying and assessing the needs of vulnerable customers. The FCA expects that, once-flagged, these customers experience a more appropriate, tailored customer journey that supports their needs. BNPL fintechs will therefore need to ensure they have suitable processes in place to identify and cater for vulnerable customers.
- Importantly, BNPL fintechs will need to be extremely transparent in their affordability assessments, maintaining detailed records. These will be vital in the event of any customer complaints to the FOS to mitigate the risk of damaging redress claims.
- The admin and cost burden of this regulation may lead to increased opt-out. In a recently published paper, 68% of e-commerce startups say they would stop offering BNPL solutions, putting them (and BNPL providers) at a commercial disadvantage in favour of those major retailers who can afford to absorb the cost.
The new regulations and processes are coming, whether BNPL firms are prepared for them or not. But it’s not enough for these firms to simply ask themselves how they can be prepared in time. For BNPL firms to stand out from the competition, they need to ask the question, “What opportunities do these regulations bring?”
We’ll examine these opportunities in detail, in part two.
Dafydd Hobbs is the Client Partner for Financial Services at Gobeyond Partners.
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