In a move by the Financial Conduct Authority, Buy Now Pay Later services are expected to be subject to regulatory frameworks under the Consumer Rights Act. 

Without much current regulation in the alternative credit space, some small businesses that apply BNPL services at checkout are quaking in their boots. Let’s dispel the rumours and walk through the possible changes that businesses may have to make. 

What is Buy Now Pay Later?

As an alternative form of credit, Buy Now Pay Later (BNPL) allows consumers to experience the instant gratification that comes with making a purchase- even when these consumers do not have the cash on hand. 

A BNPL provider will advance credit for so-called everyday purchases, such as clothing or furniture. The consumer is then placed on a repayment plan for the BNPL product over the course of the next 30-days without interest, or with the addition of interest for longer plans. 

BNPL agreements are a form of short-term financing that do not typically require a credit check. They are also known as a ‘point of instalment’ loan. Due to the lack of stringent approval criteria, this method of payment can be unsustainable for consumers who can’t afford to stretch payments or incur interest. 

Who uses BNPL? 

In the UK, the majority of online businesses now offer BNPL arrangements at checkout. Back in 2020, Klarna reported partnerships with over 6,000 small and medium enterprises, ranging from clothing boutiques to technology stores. We can only assume this number has grown since then. 

60% of all online shoppers in the US report having used Buy Now, Pay Later at least once, with the average payment debt amounting to $883. 

On the consumer side, the BNPL market has effectively replaced credit cards among 18-24 year-olds. But this is not a form of regulated credit. Users of this age group average a total payment of $250 monthly on BNPL services, making it a habit, rather than a one-off emergency experience. 

Side note: if your business is not currently using BNPL, but targets 18-24yr olds as key customers, why not? You could be missing out on a huge chunk of optimised sales! 

The state of Buy Now Pay Later Regulation 

Until this point, Buy Now Pay Later services have been totally unregulated. As a nouveau category of Fintech innovation, the FCA’s regulatory foresight wasn’t exactly quick to cover alternative credit categories. 

There are no standard disclosures for fees, and until now, there has even been debate around whether BNPLs are loans or simple business convenience features. This lack of clear information has meant that some consumers have not understood the risks and have been subjected to unexpected fees. 

Moreover, falling behind on Buy Now, Pay Later payments do not only lead to late payment fees, they can also have a negative impact on a user’s credit score. 

Isn’t it ironic that hard credit checks are not required to approve the product, but that negative credit consequences are the result of not keeping up with payments?

Proposed Regulations and Timelines

After identifying the potentially harmful impacts of BNPL, the FCA has applied an immediate ‘stopgap’ regulation by grouping BNPL under the Consumer Services Act. BNPL had previously been exempted as most individual transactions were deemed ‘small agreements’ of credit. 

The current changes are contract changes, aiming to help inform BNPL users around the terms of their loan agreement. The changes aim to reduce consumer detriment. There are four improvements: 

1. When a customer returns goods, their repayment contract may not have been cancelled and they may have previously been subject to continued instalments. However, the contract is now automatically cancelled so that the consumer is not required to pay any more instalments towards goods they do not own. 

2. The BNPL service provider previously had maximal discretion to cancel a contract, this has now been reduced

3. If the consumer is owed a refund, they may now offset future payments with that amount where this was previously unavailable

4. Consumers should be provided with clear information on how to prevent payments from being taken from their account through the continuous payment authority process (similar to a direct debit cancellation process)

A full explanation of the changes can be found at the FCA site. We expect to see the introduction of further changes in July 2022 as these changes are aimed at ‘controlling the bleeding’ rather than preventing the initial injury.    

What does compliance look like?

Right now, businesses that use Buy Now Pay Later services will not be required to make any changes to the way they operate. Instead, it’s the responsibility of the BNPL firm. This regulation has been introduced after discussions with the UK's four largest BNPL lending firms: Klarna, Clearpay, Laybuy and OpenPay.

Having said that, we expect the upcoming changes in July 2022 to have some impact on the way that small and medium-sized businesses operate in the BNPL sector, so it’s a ‘keep your eyes peeled’ kind of deal.

Of course, the introduction of further consumer protection BNPL regulation will only be a positive, since customers are more likely to be able to repay their consumer credit instalments. Plus, this should lead to a lower volume of investigations from the financial ombudsman service.

Financial services is an ever-changing landscape, so more clear terms for BNPL lenders through FCA regulation should bring greater usership to the BNPL industry, and allow retailers to continue optimising payment methods to their audience.