Why buy now, pay later lenders are going to be regulated


Gren Manuel explains what ‘buy now, pay later’ firms do – and why the regulator is concerned about the online provision of short-term credit at the point of sale.

The ancient Babylonians capped interest on loans of silver at 20%. Buy now, pay later (BNPL) achieves the apparently impossible by making a business model out of lending with no interest.

Investor enthusiasm for the model is remarkable.

In September 2020, a funding round valued Sweden’s Klarna at $10.6bn, making it the most valuable fintech in Europe.

The latest round, in March 2021, valued it at US$45.6bn. That’s multiples of the market cap of Deutsche Bank and around one third that of JP Morgan Chase.

All this with a spotty record of actual profit. The rapid growth of BNPL payments underpins this enthusiasm.

Worldpay’s 2020 Global Payments Report, released in January 2020, reckoned 5.8% of European e-commerce was done through buy now, pay later in 2019. That figure was projected to rise by more than half to 8.9% in 2023.

What buy now, pay later offers

BNPL firms were founded to address one of the biggest problems with online commerce – customers who go through the complete process but then don’t hit the final ‘buy’ button.

BNPL providers reduce ‘basket abandonment’ by providing interest-free, instant credit. In return, the merchant pays fees a few percentage points higher than conventional payment processing.

The concept is simple. The BNPL provider operates the payment system for an online merchant. When it’s time to pay, they run a proprietary algorithm using a wide range of data about the customer and the goods in the basket.

If the algorithm approves, they offer the customer no-interest, instalment-based short-term credit, such as paying nothing now and the balance in 30 days.

Regulation and buy now, pay later

Lending by BNPL firms is currently unregulated in the UK. That’s because of a long-standing provision that no licence is needed to offer short-duration, interest-free loans that are repaid in a few instalments.

This provision supports informal credit arrangements – such as a newsagent allowing customers to pay for their deliveries at the end of each week. Without it they would need some form of Financial Conduct Authority (FCA) authorisation.

A later extension to those rules in 2015 was passed without debate by a Commons committee. to help solicitors create instalment plans for clients who couldn’t immediately pay legal bills.

Mardi MacGregor is a financial services regulatory specialist at City law firm Fox Williams.

“I think when the legislation was drafted, legislators didn’t anticipate the kind of corporate provision of credit on the scale that we now see with dedicated lenders like Klarna and Clearpay and others,” she says.

Now, MPs have grasped how big BNPL is and the FCA plans to act to protect consumers.

The FCA said in February 2021, “Many consumers do not view interest-free ‘buy now, pay-later’ as a form of credit, so do not apply the same level of scrutiny.”

The regulator is also concerned that people can take out a number of agreements with different providers. That makes it easy to build up “around £1,000 of debt that credit reference agencies and mainstream lenders cannot see.”

The FCA further noted that the checks BNPL lenders carry out are focused on risks to the firm, rather than on whether the customer can afford to borrow the money.

The FCA is not the only regulator on the march.

Sweden has already moved to prevent online retailers making BNPL the default payment method. Non-debt systems such as the local Swish bank payment system must be first on the list. Regulation is also moving closer in Australia and New Zealand.

A full analysis of buy now, pay later appeared in the February issue of Financial World.

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