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Buy Now Pay Later: What's coming down the line?

27 October 2021. Published by Whitney Simpson, Senior Associate and Nicole Clerk, Trainee Solicitor

As part of a series of RPC events held during London Tech Week, Whitney Simpson, Senior Associate in the RPC Corporate team hosted a breakout discussion alongside Jourdain Tambo, Regulatory Director at the Compliance Company and Rolf Merchant, Head of Public Affairs at Innovate Finance to discuss the rise of Buy Now Pay Later and upcoming what is in store for that market.

The Buy Now Pay Later (BNPL) market has experienced exponential growth over the last decade with the effects of the pandemic speeding up its trajectory fivefold. Before the pandemic, in the UK there were 7 million BNPL users and today there are around 10 million. BNPL accounted for 4% of spend in the UK in 2020 and by 2026 UK consumers are expected to spend £40 billion using BNPL collectively. 

Why is BNPL attractive?

Consumers benefit from BNPL products through the element of control offered and the fact that there is less scrutiny involved when obtaining BNPL products. Currently retailers do not have to be regulated to offer these unregulated BNPL products and most large retailers can look to rely on the borrower-lender-supplier repayment exemption. During the discussion, Rolf Merchant highlighted the fact that although BNPL is commonly associated with fast fashion, key players in banking such as Goldman Sachs and challenger banks Monzo and Revolut are also getting involved by launching BNPL products. The current buzz around BNPL is likely to generate further innovation in the consumer credit space. In an era in which data is a powerful currency, companies with a sole focus on BNPL products hold the potential to use customer data to compete with banks and other financial institutions and begin to offer other types of financial services.  However, the alternative can be seen with Square's recent acquisition of Afterpay, which illustrates how BNPL can be added as a product line to an already successful financial services brand.

Risks and regulation

Whilst BNPL products have improved accessibility to credit for consumers, the potential harms surrounding its use must be acknowledged.  BNPL spending is commonly done by younger consumers who may not understand that they are actually obtaining credit and the debt element attached. Additionally, because the BNPL provider may only undertake a soft credit search it doesn't have to put a marker on the customer's credit file, therefore other lenders are not able to see how many other BNPL transactions are on a consumer's file and currently there is no mechanism to limit the amount of products an individual can make nor for an individual to oversee an aggregate of their outstanding instalments.  However, if a customer can't keep up with their payments, the missed payments can be recorded on their credit file so this would be disclosed as part of any affordability checks.  From the perspective of BNPL providers, they don't want to lend if they are not going to get their money back. 

The speakers discussed the Woolard Review, a review into the innovation in the unsecured credit market commissioned by the FCA, which highlighted the urgent need for the regulation of all BNPL products. Jourdain had attended two of three roundtable discussions held for market participants following the Review. These roundtable discussions highlighted financial education as a key solution in mitigating the risks associated with BNPL, with the aim for this to begin in schools to ensure younger consumers are fully prepared and protected. The FCA could also look to encourage consumers to read the terms of the BNPL agreements by requiring mechanisms to enforce this before transactions takes place. The FCA and the Treasury are currently discussing how best to bring BNPL products into the scope of regulation. 

What does the future hold?

In future, the rise in fintechs will lead to more innovative credit products such as credit card products with no physical cards and instalment plans with credit and debit cards. The speakers hope that BNPL innovation does not stagnate but the hope is that BNPL regulation will include checks on a customer's affordability – thereby having increased visibility of this form of borrowing on credit files and ensuring the fair treatment of customers. 
For now, we review and consider the Treasury's consultation which was published on Thursday 21 October 2021.  The deadline for responses is 6 January 2022. Following that and assuming Parliament then passes legislation,  the FCA has plans to consult on the new rules in 2022.