Sunrise/sunset of entrance of the RPC building.

Buy-Now-Pay-Later under the regulatory microscope

07 September 2021. Published by Whitney Simpson, Senior Associate and Harvey Briggs, Trainee Solicitor

Growth in the Buy-Now-Pay-Later (BNPL) sector is showing no signs of slowing. Square's recent $29 billion acquisition of BNPL behemoth Afterpay being the latest signal that the market is on an upward trajectory. In 2020 alone over 10 million Brits used BNPL to purchase goods online, accounting for nearly 4% of online retail sales. The Financial Conduct Authority (FCA) found that usage had very nearly quadrupled to account for £2.7 billion of spending in 2020. Such popularity, particularly among Gen-Z and Millennials, spans the globe with American consumers spending an estimated $20 billion to $25 billion in 2020 by way of deferred payments.

BNPL providers are also not the only players in the this market, with retailers, big-tech and traditional financial institutions clambering to launch their own products and grab a slice of the action. This year alone has seen New Look marketing its in-store card as a BNPL service, John Lewis launching a regulated online payment method in partnership with French bank BNP Paribas and Apple preparing its own BNPL program for Apple device purchases with PayBright.

Perhaps the greatest illustration of just how disruptive BNPL has been to the traditional credit market can be seen in the most recent valuation of Klarna, at $45.6 billion, which is greater than some of Europe's largest banks, including Barclays and Credit Suisse.

This rapid rise in popularity of BNPL products is yet another example of innovation outpacing regulation in the retail world.  Today, aspects of the BNPL sector remain unregulated and exempt from the consumer credit regime. Providers of these unregulated BNPL products and the retailers which partner them do not currently have to be FCA authorised for credit-related regulated activities under the Financial Services and Markets Act 2000.

However, 2021 has seen regulators starting to redress the balance. In the FCA's 2021/22 Business Plan published in July, the regulator pledged to work with the Treasury on new legislation that would see the extension of regulations to the Deferred Payment Credit sector. Whilst no change has yet occurred, the FCA states that subject to the Treasury's consultation (no date given at the moment), it intends to consult on new rules in 2022. For the time being, we can therefore only speculate as to what those new rules may look like and might require of retailers and BNPL providers.

The Business Plan was published following the Woolard Review, commissioned by the FCA Board, which was published in February this year, recommending “an urgent need to regulate all BNPL products”.

In response, the Coalition for a Digital Economy (Coadec), the "policy voice of tech start-ups and scaleups", published its report at the end of July. This report suggested a more proportionate approach to regulation, focusing on consumer outcomes in order to avoid stunting innovation in what is a growth area in the consumer credit market. In advocating this different approach, Coadec urged the FCA to focus on exclusive BNPL providers rather than the retailers they support after its research found that additional compliance requirements on the retailers’ end could see 68% of e-commerce start-ups shift away from BNPL.

In a previous blog on this topic, we recognised four key areas of focus for retailers when partnering with BNPL providers, which should be considered.

As recently reported in The Times, the Treasury is yet to confirm when it will publish its rules so, currently, the exact look and the timing of any regulatory change is unknown.  In the meantime, retailers may wish to consider their use of BNPL in their consumer experience as it is likely that the regulatory changes will require retailers offering BNPL, whether via a third party or through its own in-house product, to be authorised by the FCA either as a credit broker or possibly as a lender.  Therefore, retailers would be well placed to consider their consumer journey now to 'get ahead of the curve'.  For example, retailers could look now at whether their promotion of BNPL options contains clear messaging around affordability and the dangers associated with deferred payment credit.  It is important, and is likely to be increasingly important, that the key demographics who make use of such products truly understand and are aware of the risks in relation to overspending.

If you would like to hear more on this topic, the author and other colleagues will be speaking at London Tech Week.  Details can be found here.