The British government announced that the increasingly popular interest-free ”buy now pay later” (BNPL) credit agreements will be regulated by the Financial Conduct Authority (FCA) in order to protect consumers.
The government noted that the volume of transactions involving BNPL solutions more than tripled in 2020 as the pandemic drove online shopping, “and there is now a significant risk that these agreements could cause harm to consumers.”
It added that it wants to ensure that customers continue to benefit from these products but “with the right protections.”
John Glen, the British economic secretary to the treasury, pointed out that BNPL “has clear benefits”, such as managing one’s finances by spreading the cost of a purchase interest-free, but a review commissioned by the FCA “found several potential harms which can be mitigated by bringing these agreements into regulation.”
He highlighted that many consumers do not view interest-free BNPL solutions as a form of credit, so do not apply the same level of scrutiny.
Although the average transaction tends to be relatively low, shoppers can take out multiple agreements with different providers, and the government’s review finds it would be relatively easy to accrue around £1,000 (€1,155-$1,400) of debt that credit agencies and mainstream lenders cannot see, the minister added.
“With several buy now pay later providers planning to expand to higher-value retailers, or offer their products in-store, the risk that consumers could take on unaffordable levels of debt is increasing,” he warned.
The review, called the Woolard Review, said that data provided by some BNPL providers indicate that 25 percent of users are aged 18-24 and 50 percent are aged 25-36, and that 75 percent of users are female and 90 percent of transactions involve fashion and footwear. In most cases the service is free to the consumer, as long as repayments are made on time.
A survey carried out by the FCA in December 2020 found that 11 percent of consumers said they had used a BNPL product since the start of the Covid-19 outbreak. The increase in the use of BNPL was due to greater awareness of its existence and the expansion in the number of partner retailers. Some consumers reported they were using BNPL products to manage their finances because of the financial distress they experienced during the crisis.
The total value of transactions in 2020 for the BNPL firms the FCA has engaged with was £2.7 billion (€3.1bn-$3.8bn). This compares with approximately £246 billion (€284bn-$345bn) of consumer credit borrowing. Overall, BNPL is around 1 percent of the total credit market in the U.K., ”but has accelerated very quickly to get there and is still growing,” according to the Woolard Review.
The providers of BNPL credit agreements in the U.K. include Clearpay, Klarna, LayBuy, Openpay and PayPal.
In Europe, Sweden has already sought to regulate the BNPL market with the E-Commerce Payments Bill, which came into force in July 2020. It prohibits online retail platforms presenting credit options before debit options. As a result, BNPL solutions cannot be offered as the first choice ahead of the lowest cost direct payment option, the review stressed.