What is ‘Buy-Now-Pay-Later’ or BNPL?
BNPL companies offer consumers short-term, point-of-sale loans with little or no fees or interest. This is usually done either by credit, which is repaid over a period of time, or by billing payments, which allows consumers to make repayments in installments (usually 3 or 4). The main source of income for BNPL companies comes from merchant commissions, which can amount to between 3 and 6% of the purchase price.
An engine of change
BNPL’s businesses have significantly changed the payments landscape in recent years, particularly during the pandemic, due to their ability to meet growing customer needs by providing a digital experience with interest-free installments. Research has shown that Gen Z have shunned high interest credit cards, leaving space for the BNPL sector to enter the market. BNPL companies also help merchants by increasing their revenue, improving customer loyalty and increasing their customer base. Online conversion rates are often highest and shopping carts higher where BNPL is used in the transaction[1].
BNPL lending in the UK in 2020 was estimated at £2.7bn, meaning the BNPL market was then already larger than the UK payday loan industry at its peak in 2013[2]. It has even been estimated that the global BNPL industry will reach US$900 billion by 2026[3].
However, this model, like any other platform model, comes with both challenges and risks.
Current position: very limited regulatory oversight
As with many areas of law, regulation can often take time to catch up with developments in the real world. This is especially the case in the ever-evolving FinTech space. Currently, only certain BNPL products are regulated by the FCA under the Consumer Credit Regulations, with many BNPL credit agreements relying on the exemption under section 60F(2) of the Consumer Credit Order. regulated activities (CAD) which provides that certain BNPL agreements are exempt from regulation”because they are interest-free and free of charge, and are repayable in a maximum of one year in 12 installments or less”[4]. It is important to note that in many cases (but not all) the absence of interest and fees charged by the BNPL company is true unless and until a customer misses a payment.
This exemption has allowed a multitude of players to enter a market with little or no supervision by the FCA.
When credit is classified as unregulated, lenders do not need to: (i) perform credit checks or share data with credit bureaus; (ii) provide pre-contractual information; (iii) comply with the Advertising Rules on Financial Promotions; or (iv) assess whether the applicant can afford the credit (unlike where credit is regulated). Furthermore, consumers are not able to seek redress or complain to the Financial Services Ombudsman. The benefit to BNPL traders and businesses is clear but potentially detrimental to the most vulnerable members of society.
While a BNPL provider sought to back the service saying: “there is clearly a greater risk of consumer harm from credit card spending”[5]it is important to note that in 2021 in the UK, 19.5% of active credit cards were charged for BNPL transactions[6] and there are other concerns when bank overdrafts and loans from friends and family are used to make repayments. The concerns with BNPL therefore revolve around: (i) consumers’ ability to pay BNPL installments when those installments are charged to a credit card; indeed, although there is an overall BNPL interest rate of 0%, the reality is that installments charged to the credit card, when not paid monthly, will incur credit card interest rates of credit (which can be around 20%); and (ii) lack of consumer protection; one example being the possibility of ‘stacking’ – when a consumer uses multiple BNPL providers, none of which perform thorough credit checks, allowing a credit spiral resulting in unmanageable consumer debt.
The future regulation of the BNPL?
The current economic climate of crisis in the cost of living, rising inflation and interest rates and discussions of broader recessionary pressures, have the potential to create an environment that makes BNPL more attractive to consumers. For this reason, in September 2020 the FCA Board of Directors commissioned a review of the unsecured credit market and the extent to which additional regulation might be needed. The result was the Woolard review, which concluded there was an urgent need to regulate all BNPL products[7].
Most recently, on June 20 this year, the government presented its plans for increased regulation of interest-free BNPL products and other forms of unsecured short-term interest-free credit when provided by third-party lenders. , which poses similar risk problems for consumers[8]. Significantly, the plans specify that suppliers who offer BNPL products:
- be required to perform credit checks to ensure that loans are affordable to consumers;
- the need to ensure that all advertisements of BNPL are fair, clear and not misleading;
- must be FCA approved; and
- consumers will also be able to lodge a complaint with the Financial Ombudsman Service.
The government will allow exemptions for specific agreements where there is a limited risk of potential harm to the consumer and where the regulations would otherwise negatively impact day-to-day business operations.
The government has felt that it will have to publish and consult on draft legislation to ensure that it achieves the intended policy objectives. Following this, the government will proceed with the drafting of the final legislation, the draft of which should be published towards the end of the year. After extensive consultation, the government aims to table secondary legislation in mid-2023 that will confirm the scope and framework of the new regulatory regime[9].
While the absence of any concrete regulation to date has allowed the BNPL industry to thrive, there will inevitably be a period of transition and BNPL businesses will therefore soon be very aware of the complexities that come with being in a market governed by multiple different regulatory regimes. and ways of working.
Action for BNPL companies to take now
Despite this lack of immediate regulation, BNPL businesses should use this time to acclimate to the impending regulatory demands that will be placed upon them. In addition, all BNPL businesses should be aware that they are required to comply with consumer protection legislation, which includes the Consumer Rights Act 2015 (BOW) for contracts made on or after 1 October 2015 and the Unfair Terms in Consumer Contracts Regulations 1999 for contracts made between 1 July 1995 and 30 September 2015.
The FCA has the power to enforce consumer protection legislation and has been proactive in this regard, with some BNPL suppliers agreeing to change the terms of their consumer contracts to make them fairer and easier for customers to understand. consumers.
In anticipation of stricter regulation, BNPL companies should review their consumer contracts against the requirements of consumer protection legislation to ensure that the spirit of fairness is reflected.
For example, the CRA imposes the following requirements:
- contractual terms must be fair (taking into account the nature of the object and the contract and by reference to all the circumstances existing at the time when the term was agreed (article 62 CRA):
- the CRA provides a list of terms in consumer contracts that may be considered unfair (although ultimately only a court can decide);
- where consumers exercise their right to cancel an online sales contract, the relevant loan agreement is terminated in accordance with Regulation 38(1) of the Consumer Contracts (Information, Cancellation and Additional Charges) Regulations 2013; and
- BNPL firms must therefore ensure that:
- all terms setting out what happens if a consumer cancels the contract for purchases financed by the BNPL loan are fair and clear, so consumers should not be required to continue paying installments or pay late fees for not paying the installments after the terminated loan agreement. Where a retailer has been late in notifying BNPL of a canceled agreement, the terms should state when and how a refund of any monies charged will be made; and
- any rights of set-off do not preclude the possibility for the consumer to set off the sums which may be due to him by the firm BNPL with installments.
- contractual clauses must be transparent (expressed in clear and intelligible language (article 68 CRA)):
- to the extent that charges are imposed for late payment, this should be made clear to the consumer in BNPL’s business conditions; and
- any conditions for continuous payment authorization (where a consumer gives their card details and consents to BNPL taking money from their account) must be transparent. Accordingly, when drafting these terms, BNPL companies should make clear how consumers can cancel this authorization and detail how this will affect any overdue payments that will become due.
International platform but localized regulatory approach
Starting a business in FinTech presents challenges, especially for BNPL companies with the range of local rules and expected changes therein. Therefore, such cross-border complexities represent a significant challenge for BNPL players, but the market has the potential to create huge opportunities. BNPL companies should consider opportunities to expand their business globally while ensuring a localized regulatory approach.
