A regulatory crackdown on the booming Buy Now, Pay Later (BNPL) sector is in sight after the Treasury launched a policy options consultation for the market today.
Consumer rights charity Citizens Advice has urged the government to quickly translate the consultation into action, as it warned BNPL borrowing can ‘be like quicksand – easy to slip in and very hard to get out’ .
BNPL products allow online shoppers to delay payment without interest and are offered by a host of major online retailers. Customers can defer payment for up to 30 days after purchase, or spread repayment over six-week to four-month installments.
Payment products have grown rapidly during the pandemic thanks to their popularity with online shoppers, and the market swelled to £2.7bn last year.
But the Woolard review of the sector published earlier this year pointed to potential harm to consumers as the market swells, including a lack of affordability checks, product information and credit agreements, and a inconsistent treatment of people in financial difficulty.
BNPL products have also come under fire from campaigners warning they can encourage consumers – especially young shoppers – to rack up debt.
The sector is currently unregulated and relies on exemption from consumer credit rules, although this has led to inconsistent practices.
The Treasury said today that the consultation ‘sets out the policy options for achieving a proportionate approach to the regulation of BNPL’, after the Woolard review recommended that BNPL products be brought into the scope of application of FCA regulations.
“When a consumer finance industry grows as quickly and as far as BNPL, it’s almost inevitable that the FCA will have to regulate it,” Richard Barnwell, financial services partner at BDO, told City AM yesterday.
“What the Treasury will have to balance is treating borrowers fairly while allowing this fast-growing sector to deliver what consumers want.”
Space startups have urged caution over FCA plans to introduce regulation in the sector. In a recent report, the Coalition for a Digital Economy (Coadec) hit back at the idea of “rigorous credit checks,” calling instead for proportionate accessibility monitoring.
But in a recent survey conducted by Laybuy, a BNPL supplier who claims to be the “only supplier to carry out rigorous credit checks”, 63% of consumers said they want companies to carry out rigorous credit checks before to enable them to take out a loan.
“I would be very suspicious of any BNPL or credit provider who thinks this is not in the best interests of their customers and their own business,” said co-founder Gary Rohloff.
Klarna, the industry’s largest provider, currently performs less rigorous “soft” credit checks on consumers.
And in a preemptive move earlier this week, Klarna revamped its product, introducing a “pay now” service and new wording to make it “absolutely clear” to shoppers that they’re being offered credit with penalties for missed payments.
Responding to today’s consultation, Klarna co-founder and CEO Sebastian Siemiatkowski said the company is “continually setting the standard for the industry”, but pointed to the “bad products that exist”.
“Ultimately, this [consultation] will promote consistency and improve outcomes for all consumers, especially as we see more traditional lenders entering the industry who, as we all know, have a long history of coming up with dirty tricks to keep their customers in debt in adding fees and charging high interest,” says Siemiatkowski.
Meanwhile, Anthony Drury, chief executive of small supplier Zip, welcomed the consultation and said it had ‘not waited for regulation’ and had ‘already put measures in place to protect and support customers “, but did not specify what these were. .