Calls to regulate the burgeoning “buy now, pay later” (“BPL”) industry have not deterred big brands like Apple and Amazon from the idea of offering consumers an interest-free and cost-free way to spread out payments for purchases. Apple quoted “the financial health of users” when he announced the introduction of this new feature earlier this month, but research shows that financially vulnerable people need more protection. It is possible to regulate this sector to protect consumers without completely restricting access. By learning from previous efforts to regulate the payday loan industry, for example, the industry and its regulators could take steps to prevent abuse.
The use of BNPL payment platforms almost quadrupled in 2020, with transaction values reaching £2.7 billion ($3.31 billion). In 2021, the value of BNPL transactions in the UK increased by 70% to reach £6.4 billion ($7.83 billion), or 5% of the total e-commerce market. This form of credit allows people to pay for online purchases in installments without a credit check. It tends to attract younger borrowers, with a quarter of users aged 18-24 and half aged 25-36, according to data shared by providers with UK financial regulator the Financial Conduct Authority (“ FCA”).
It also encouraged some buyers to spend more that they cannot afford. According to Citizens Advice, two in five BNPL users have had trouble repaying, and one in four of those who missed a payment were contacted by debt collectors. And while BNPL was designed as a convenient way to buy big-ticket items like sofas and TVs, the rising cost of living means people are now using it to pay for essentials, such as food and toiletries. Research has also revealed that users unable to repay their BNPL sometimes use credit card with typical interest rates of 20% to delay repayment of their debt.
An increase in the number of overloaded users isn’t just hurting consumers, it could also be hurting businesses. Retailers have increasingly dependent on BNPL to boost sales by allowing people to spread the cost of goods over a series of payments. They pay the supplier a fee for the goods purchased and BNPL’s business model depends on repeated consumer use. Retailers have used it to tackle recent challenges like Brexit and COVID-19. Up to 92% of merchants interviewed last year had integrated their first BNPL solution since early 2020. But the rising cost of living crisis has changed the economics of this form of credit for all parties involved.
Lessons for BNPL regulation
Therefore, regulation seems increasingly likely, and necessary, to provide consumers with better protection against financial harm. The FCA has already applied new contractual changes terms and conditions to help protect consumers using Klarna, Clearpay, Laybuy and Openpay. These new measures include protecting consumers who cancel their goods through BNPL against late payment charges.
For the moment, it is hoped that other providers will follow. This regulation needs to be applied across the industry in a way that protects consumers without removing access to this form of finance. The regulation of personal loans in 2015 is full of lessons for the BNPL. My research on borrower experience shows that while regulating “high-cost, short-term” credit prevented users from taking on too much debt, it also prevented many people from accessing that credit. Ultimately, this settlement limited consumer choice by forcing several leading lenders to administration. Their Business plans no longer worked due to tougher lending rules and a cap on the cost of credit, combined with an influx of pre-regulation claims.
Financial regulation aimed at protecting consumers must support those on the lowest incomes who bear the heaviest burden in the cost of living crisis. More generally, a revaluation of benefits in line with inflation would be useful. Credit is not always the right solution, but affordable community finance providers such as credit unions and community development finance institutions should also be encouraged. For BNPL regulation in particular, regulators can and should design rules that will ensure that consumers are protected but also able to continue to use this increasingly popular form of finance. According to my research, the following measures would help:
– Clarify that BNPL is a form of credit and the implications of its use so that consumers can make informed decisions;
– Ensure that providers carry out sufficient and appropriate checks to determine whether consumers can afford to repay their loans alongside their other financial commitments in order to reduce their overall indebtedness. This would rely on real-time data access to avoid multiple loans from multiple vendors; and
– Added more protection of consumer goods to match other forms of credit such as credit cards, which offer reimbursement if goods are lost or damaged.
The BNPL model is unlikely to disappear anytime soon. Instead, BNPL companies are already beginning to adapt to a more regulated future by changing their business models to some extent. For example, Klarna’s movements towards report your data to credit rating companies certainly indicates that he anticipates regulation of the sector, as well as an economic downturn that could curb its growth in the near future. Even with this outlook, however, confidence in the sector remains. Thoughtful regulation will ensure that current players and new entrants alike have the ability to create responsible BNPL offerings that online shoppers can continue to add to their baskets.
Lindsey Appleyard is Adjunct Professor at the Research Center for Business in Society at Coventry University. (This article was originally published by The conversation.)