BNPL regulation: boom or bust for the march on credit cards?

As ‘buy now pay later’ (BNPL) financing becomes ever-more popular, some providers claim they are taking would-be customers from credit card issuers. But with FCA regulation on the horizon, might the sector’s growth be curbed?

The rise of BNPL has been meteoric. 

Now the fastest growing online payment method in the UK according to Finder, BNPL has a growth rate double that of bank transfers and more than triple that of digital wallets. Covid has only acted as an accelerant for the trend, as more shoppers and retailers went online.

The use of BNPL products in the UK reached £2.7bn at the start of 2021 and continues to climb, according to the Financial Conduct Authority (FCA). More recently, a survey by instalment payments provider Splitit confirmed that over half of UK credit card users plan to use BNPL products within the coming year.

The practice – which allows customers to defer payments on fashion and beauty products, furniture and even groceries for periods ranging up to 12 months – charges zero per cent interest on short-term loans and permits customers to break payments up into more manageable instalments.  

It’s a win-win for both retailers and BNPL providers too. Merchants enjoy increased retail conversion rates of between 20 and 30 per cent, according to RBC Capital Markets, and lenders take transaction fees from the sales.

BNPL fintech giants Klarna, Butter and Clearpay have become household names in the past few years, with Klarna even launching a physical card for shoppers to use in-store.

Low regulatory barriers to entry have also encouraged the emergence of newer market participants. 11 BNPL fintechs now crowd the UK market, with some new names also eying launch within the next few months.

Yet BNPL products, while inherently popular, also incite an element of moral panic among some. 

The boom in users has prompted concern that the credit product encourages spiralling consumer behaviours and unsustainable levels of debt. According to a survey by Equifax, 43 per cent of respondents reported missing a payment on a BNPL loan, leaving them vulnerable to providers’ sometimes punitive terms and conditions.

At the same time, others have warned, consumers don’t understand they are using credit.

A 23-year-old university student spoke to AltFi about her own experiences with BNPL, and how common the payment method was becoming among her friends.  

“I use Klarna and AfterPay all the time,” she says. “It makes my finances so much easier to manage month-to-month. But some of my friends have ended-up spending too much and struggling to manage their repayments. It made them very anxious about how it could impact their credit score.”

Currently, lenders are not required to carry out assessments around customer creditworthiness and some charities claim that providers’ advertising encourages bad spending behaviours.

“We had one client who was being chased down by debt collectors for missed payments from one provider, while being offered credit from another,” debt charity StepChange tells AltFi.

The FCA’s Woolard Review was commissioned off the back of such concerns. The report, which investigated the potential harm that these lending products could cause on consumers, has been followed by a consultation between the FCA and HM Treasury to determine the level of regulation required over the BNPL sector. Regulation is expected to be imposed within the year.

In the meantime, providers wait with bated breath for its conclusion, which is likely to bring tighter strictures across affordability and credit checks, notices of arrears, associated contractor requirements, post-sales servicing, and advertising.

According to BNPL expert, Peter Finch, at law firm Fox Williams, the prospect of regulation over the sector has been met with a mixed response among providers.

“Some fintechs have actually welcomed the news as a means of building credibility in the sector and raising the barrier to entry for competitors,” he says. “But smaller providers, and ones that are less established in the market, are concerned about the added cost and stress that greater regulation is likely to bring.”

New Zealand-headquartered BNPL provider Laybuy hails from a country with a more mature and more regulated BNPL market.

According to co-founder and managing director, Gary Rohloff, customer protections have long been interwoven into Laybuy’s business model, which saw UK customer sales expand by 500 per cent in 2021 compared to 2020 figures.

“BNPL is a low-risk payment method but, clearly, there is a concern about the affordability and potential of debt for customers using these services; it is a concern we share,” says Rohloff. “We would like to see creditworthiness checks made compulsory for all BNPL providers. Some might not like it, but it’s important to ensure that providers are lending responsibly.”

StepChange echoed the sentiment, adding: “We would like to see similar protections as with other forms of credit. This means affordability checks, a duty to treat customers fairly, support for users who cannot pay, and marketing rules so that products are not presented in a way that exploits consumer vulnerability and behavioural bias.”

Though FCA regulation is now inevitable, activity within the sector remains prolific. Klarna plans to float at some point in 2022 and US fintech giant Block recently announced its acquisition of BNPL giant Afterpay. With consumer appetite for BNPL still growing, it’s hard to see regulation stemming the flow of new BNPL market entrants any time soon.

Manchester-based fintech PollenPay is one such player that has chosen to launch in the UK market early this year. The company’s CEO, former design engineer Leon Wilson, was inspired by the BNPL market in Australia – which he claims was capturing 10 per cent of all online sales at the time – and wanted to mirror its success in the UK. He argues that the credit landscape has evolved, and consumers now need more flexible credit solutions that consider changes in spending behaviours.

“Times are changing,” says Wilson. “Less than half of millennials own a credit card these days. And 93 per cent of the ones that don’t, would never entertain the idea of getting one either.”

It is a bold time for a young BNPL start-up to choose to launch, amid such uncertainty about the future regulatory landscape. But Wilson is confident in PollenPay’s survivability and actually invites greater scrutiny of the sector by the regulator.

“From a selfish business point of view, regulation is a useful defence mechanism against potential competitors in this industry. But that aside, building confidence among consumers that BNPL is a safe and regulated tool to use, can only be a good thing.”

As the sector develops, some providers have adopted an ‘expand and conquer’ approach, cementing their place in the market either by broadening-out access and appeal of the service, or allowing customers to cherry-pick the best from both credit worlds.

Splitit, for instance, has opted to combine BNPL services with traditional credit cards, having found that 49 per cent of people prefer a hybrid credit service. Block’s acquisition of AfterPay also opens-up the possibility for SME retailers in Australia and the US to offer 'buy now, pay later' at checkout, widening the applicable customer pool substantially.

A fast-evolving sector, BNPL providers, perhaps unsurprisingly, are proving their ability to adapt quickly to the changing environment. While future FCA regulation may give some new market entrants pause, the business opportunities BNPL still presents, for many, far outweigh the downside.