Although formal regulation of “Buy now, pay later” financial products is still unlikely to arrive before the second half of the year, at Sikoia we were excited to see the UK’s Financial Conduct Authority start to outline what this will look like – and, just as importantly, why they want to implement their proposed changes.
One of the major trends we’ve all seen over the last few years has been the rise of BNPL products, which have proven to be hugely popular with consumers – especially millennials, Gen-Zers, and other groups that are often categorised as a “thin file” from a credit perspective. Consumers can now stagger payments for products at hundreds of retailers, including major high street names such as ASOS, Boohoo, JD Sports, Hugo Boss and Made. Part of the reason these are so popular are the terms – consumers only pay interest or fees if they fail to meet their repayment schedule.
We’re even seeing BNPL products becoming increasingly mainstream: neobanks Revolut and Monzo are both experimenting with providing BNPL products; and Barclays launched an instalments option in partnership with Amazon last year for payments over £100 (although unlike BNPL platforms it charges interest over the payment period). The market nearly quadrupled in 2020 and is now valued at £2.7bn, with 5 million people using these products since the beginning of the coronavirus pandemic, which caused a boom in online shopping.
However, the FCA has warned that BNPL could cause significant problems for consumers. For example, more than one in 10 customers of a major financial institution using the scheme were found to be in arrears. Equally, for all that the major financial institutions are increasingly offering these products, we know that there has still been a lot of uncertainty around how these payments should be treated. At their heart, these products are effectively a loan: the providers still accrue a risk; and from a consumer perspective, these are still debts that must be regularly serviced and cleared.
“There is the distinct sense that the FCA had become tired at the pace of BNPL reform”
This uncertainty occasionally leads to unexpected outcomes. Unlike any other (consumer) loan, where the provider can report back performance to the bureaus, institutions have no way of understanding how customers have been servicing these “loans”, and no sense of what a customer might be able to afford. As such, we had seen a few financial institutions, particularly some mortgage providers and other more-traditional lenders, starting to treat BNPL payments as risk indicators, in much the same way they might view a gambling transaction or a payday loan.
In a way, all this cuts at the heart of the customer value proposition – and for many customers, who make their payments regularly and are otherwise demonstrating “good risk” behaviour, they risk being penalised without cause.
In mid-February, the UK’s financial regulator is said to have reached an agreement with leading industry players, including Klarna, Clearpay, Laybuy and Openpay, to rewrite their terms and conditions to better align with the existing Consumer Rights Act.
As a result of the FCA’s announcement, we can expect a more comprehensive suite of regulations to be applied to BNPL products. Providers will be expected to make terms on BNPL products fairer and more transparent. We can expect clearer rules for when a customer returns an item funded by a pay later loan, a more precise definition of when a customer’s pay later account can be suspended, and a better explanation of how customers can cancel their continuous payment authority.
Many consumer groups have welcomed this decision due to a widespread concern that customers may not understand what they were signing up to, or the financial consequences of using such products. Similarly, most BNPL providers agree that this new regulation has been long overdue and will allow businesses to keep pace with new product offerings and changes in consumer behaviour. For example, Clearpay, Laybuy, and Openpay have all changed the terms that involve late payment fees, which has resulted in them voluntarily agreeing to refund customers who have incorrectly been charged late fees in specific circumstances.
Just as interesting is the rationale behind these changes, as there is the distinct sense that the FCA had become tired of the pace of BNPL reform. While this looks and feels like a Financial Services and Markets Act (FSMA) action, it was really implemented under their CRA powers. And where the credit reference agencies had been slow to engage with the industry, each of the major bureaus has recently announced that they’re working on a solution.
At Sikoia, we firmly believe this is good for both consumers and providers of BNPL products. By recognising that a BNPL product is effectively a loan, and that servicing these loans are positive credit indicators, the FCA have transformed one of the most popular financial products from a potential negative indicator to another way that (thin-file) consumers can demonstrate good financial behaviour and boost their scores.
The FCA’s announcements are also a welcome sign that the industry has matured and is here to stay. BNPL services are in huge demand right now and will only increase in popularity. They can provide thousands of individuals with the opportunity to buy products they couldn’t otherwise afford and demonstrate to credit rating agencies that they’re exhibiting the right behaviour.
Of course, this does place some additional burdens on BNPL providers: they must pass performance data back! Needless to say, we can help you. At Sikoia, we have a vast amount of experience supporting our customers with all their data challenges – ask us about how we can help you launch your own BNPL product for consumers or businesses.