The Coalition for a Digital Economy (Coadec), the independent advocacy group that serves as the policy voice for Britain’s technology-led startups and scaleups, has launched a new paper proposing a robust and proportionate framework for the supervision of Buy Now, Pay Later (BNPL) products. The report comes after the Woolard Review of “change and innovation in the unsecured credit market” published its findings in February 2021, advocating for BNPL regulation. A consultation into BNPL regulation is expected over the next few months.
BNPL credit has taken off during the covid pandemic. With an average transaction of £65-75, in 2020 over 10 million people used BNPL to purchase goods online, accounting for nearly 4% of online retail sales. BNPL enables buyers to delay payment with no incurred interest, for up to 30 days after purchase, or alternatively to spread repayment across six weeks to four month installments.
Using BNPL avoided £76 million in interest fees from credit cards in 2020 according to Capital Economics, based on analysis of BNPL spending versus equivalent spend on conventional credit cards. BNPL users exhibit lower default rates than conventional credit cards. Figures from market leading BNPL firms suggest that default rates range from 1-5%, compared somewhat favorably to 6.4% defaults on credit card payments.
BNPL is not a directly regulated activity and instead relies on an exemption from consumer credit rules under the Financial Services and Markets Act 2000 Order 2001 (FSMA), originally intended for short-term invoice deferral. The lack of regulation has led to inconsistent practices within the sector, including inconsistent, or absent, affordability checks, payment schedules, fees, consumer protection policies and the complaints process. Regulation should focus on 5 themes:
- Zero-in on regulating providers, not retailers. Placing the onus on the retailer would disproportionately increase administrative and compliance costs for e-commerce startups and SMEs relative to the large retailers who could afford compliance. Additional compliance requirements would lead 68% of e-commerce startups to stop offering BNPL solutions. 86% said that this would put them at a commercial disadvantage to larger players, as it would prevent them from being able to offer a customer experience that is increasingly in demand.
- Require providers to develop processes that track affordability. Importantly, this requirement should not be for a “hard credit check”. These checks cost a premium dictated by the big three Credit Rating Agencies, while the prospect of receiving 5 ‘credit checks’ for taking out five BNPL loans totalling £350 is hardly proportionate. In contrast, affordability tracking should be proportional to the risk involved: a possible solution could be to leverage Open Banking through providers like Aire to assess affordability, particularly as this would give providers visibility of existing customer liabilities with other BNPL firms.
- Drag the credit rating industry into the 21st Century. Use Smart Data regulation to prise open the Credit Rating Agencies’ treasure trove of data that should actually belong to the customer.
- Tighten consumer communications. Regulators could look into mandating the reporting of metrics that demonstrate consumers have been provided with adequate information about the payment method, such as complaint volumes and complaints upheld by the Advertising Standards Authority. Bad practice by either merchants or BNPL providers should be held to account and an effective customer redress mechanism should be introduced.
- Provide a better customer redress model. The FCA should review the impact of regulator complaints rules on competition in retail financial services markets. It should also consider whether a single ombudsman service for the whole financial services industry is still the right approach.
The vast majority of BNPL providers in the Coadec community welcome regulation and would like to see a regime implemented quickly and proportionately. It is vital that the benefits of BNPL are not lost in the process of regulation, however. To apply a blunt implement under the auspices of avoiding consumer harm would be to throw the baby out with the bathwater.
Commenting on the report Charlie Mercer, Head of Economic Policy at Coadec, said: “This report injects some sense into the debate around BNPL. All too often BNPL is discussed in the press without regard for the realities of user experience, default rates, best practice, and the risk involved. This means that the very real issues with the status quo could be missed.
“While the Woolard Review was a welcome catalyst for change, the answer does not lie with stunting innovation and over-prescription. Instead, regulation should be proportionate and focused on consumer outcomes: this report offers a vision of what this could look like. Getting this wrong now could lead to impairing or even killing off innovation in the consumer credit market.”