Growth in the Buy-Now-Pay-Later (“BNPL”) sector is showing no signs of slowing, with Square’s recent $29 billion acquisition of BNPL behemoth Afterpay being the latest signal that the market is on an upward trajectory. In 2020, alone, over 10 million Brits used BNPL to purchase goods online, accounting for nearly 4 percent of online retail sales. At the same time, the Financial Conduct Authority (“FCA”), a financial regulatory body, found that BNPL usage had very nearly quadrupled to account for £2.7 billion of spending in 2020. Such popularity, particularly among Gen-Z and millennial consumers, spans the globe with American consumers spending an estimated $20 billion to $25 billion in 2020 by way of deferred payments.
Big-name providers, such as Afterpay, Klarna, Affirm, and co., are not the only players in the BNPL market, with retailers, big-tech and traditional financial institutions clambering to launch their own products and grab a slice of the action. This year, British fashion retailer New Look has been marketing its in-store card as a BNPL service. John Lewis launching a regulated online payment method in partnership with French bank BNP Paribas, and Apple preparing its own BNPL program for Apple device purchases with PayBright.
Perhaps the greatest illustration of just how disruptive BNPL has been to the traditional credit market can be seen in the most recent valuation of Klarna, at $45.6 billion, which is greater than some of Europe’s largest banks, including Barclays and Credit Suisse.
This rapid rise in popularity of BNPL products is yet another example of innovation outpacing regulation in the retail world. Today, aspects of the BNPL sector remain unregulated and exempt from the consumer credit regime. Providers of these unregulated BNPL products in the UK and the retailers that partner with them do not currently have to be FCA authorized for credit-related regulated activities under the Financial Services and Markets Act 2000. However, 2021 has seen regulators starting to redress the balance.
In the FCA’s 2021/22 Business Plan published in July, for instance, the regulator pledged to work with the Treasury on new legislation that would see the extension of regulations to the Deferred Payment Credit sector. While change has not yet occurred, the FCA has said that subject to the Treasury’s consultation (no date given at the moment), it intends to consult on new rules in 2022. Therefore, for the time being, we can only speculate as to what those new rules may look like, what they might require of retailers and BNPL providers, and whether other regulators will follow suit and adopt similar rules.
The FCA’s Business Plan was published following the Woolard Review, a review of change and innovation in the unsecured credit market that was commissioned by the FCA Board and published in February of this year, recommending “an urgent need to regulate all BNPL products.”
In response, the Coalition for a Digital Economy (“Coadec”), the “policy voice of tech start-ups and scale ups,” published a report of its own at the end of July, in which it suggested a more proportionate approach to regulation, focusing on consumer outcomes in order to avoid stunting innovation in what is a growth area in the consumer credit market. In advocating for this different approach, Coadec urged the FCA to focus on exclusive BNPL providers, such as the Klarnas of the world, rather than the retailers they support after its research found that additional compliance requirements on the retailers’ end could see 68 percent of e-commerce start-ups shift away from BNPL.
In a previous blog on this topic, we recognized four key areas of focus for retailers when partnering with BNPL providers, which should be considered. These include: (1) adopting a simple process for the customer – particularly ensuring the online or app process is easy and speedy to use; (2) understanding how the provider’s BNPL offering works, both from a customer perspective and “behind the scenes” and cover off the risk areas in your contract with the provider; (3) transparently providing information to consumers about BNPL offers that is balanced and appropriately reflects the risks (for example, including the circumstances in which customers could have to pay interest and how this interest would be calculated if those circumstances arose), as well as the benefits of the product; and (4) adhering to compliance requirements when on-boarding a new payments provider.
As recently reported in The Times, the Treasury has not yet confirmed when it will publish its rules, and so, currently, the exact look and the timing of any regulatory change is unknown. In the meantime, retailers may wish to consider their use of BNPL in their consumer experience as it is likely that the regulatory changes will require retailers offering BNPL, whether via a third party or through its own in-house product, to be authorized by the FCA either as a credit broker or possibly as a lender.
As such, great consideration should be given to the way in which the presentation of BNPL offers are woven into their customer journey and retailers would be wise to consider this journey now to get ahead of the curve. For example, retailers could begin to look at whether their promotion of BNPL options contains clear messaging around affordability and the dangers associated with deferred payment credit. Great care should be taken in promoting BNPL options, avoiding incentivization over education. It is currently important – and is likely to be increasingly important – that the key demographics who make use of such products truly understand and are aware of the risks in relation to overspending.
Whitney Simpson is Senior Associate at Reynolds Porter Chamberlain LLP, who specializes in non-contentious consumer finance and payment related matters.
Harvey Briggs is a second year Trainee Solicitor at RPC, currently sitting in the IP & Technology team.