Fueled by the exponential growth in ecommerce, Buy Now, Pay Later (BNPL) has been one of the biggest retail trends of the last few years. For consumers, BNPL offers an easily accessible borrowing method, with the ability to spread the cost of purchases over an agreed period. For retailers, the schemes can reduce shopping cart abandonment and increase the average spend per customer.
If managed correctly, BNPL offers a convenient way to access credit, but late or missed payments can lead to high fees, increased debt, and poor credit ratings. The inability of some consumers to pay back BNPL loans has sparked growing concern from regulatory bodies worldwide. In the UK, BNPL legislation is already in motion, with industry opinion currently in flux regarding the payment method’s future.
In this article, we’ll look at the current state of BNPL regulation in the UK, where the laws are heading and offer advice for business owners unsure how the changes will impact their ecommerce operations.
In the UK, zero-fee credit agreements of under 12 months are currently outside of Financial Conduct Authority legislation. On 20 June 2022, the UK government officially responded to calls for BNPL regulation, highlighting potential risks to consumers from Buy Now, Pay Later loans:
Shoppers may borrow more than they can afford.
Terms and conditions often lack clarity.
Credit ratings can suffer due to late repayments.
Plans are now drawn up to include BNPL in the Consumer Credit Act 1974, with lenders required to seek FCA approval and offer consumer affordability checks. In addition, incentives to apply for BNPL loans will be subject to the Financial Promotion Regime to ensure they aren't misleading. Shoppers will be able to complain to the Financial Ombudsman if issues arise following a BNPL purchase.
The UK government will publish draft legislation by the end of 2022, with official regulation in place by mid-2023. The FCA will then conduct further consultation to regulate the industry.
78% of respondents expect BNPL use to rise as the cost of living and inflation increase.
51% think further regulation will increase the use of BNPL.
36% expect to see no change.
64% say more regulations will increase their trust, as a business, in BNPL.
Despite the soaring popularity of BNPL, consumers are increasingly reluctant to get into more debt. BNPL schemes have been guilty of targeting the younger generation in recent years, leading to plenty of hostile public (and media) opinions on the matter. Despite a lack of financial experience, many younger consumers are now uncomfortable with the idea of Buy Now, Pay Later, especially as we head into an economic downtown — though the lack of hard credit checks for BNPL loans remains a strong attraction to some.
Until recently, retailers have mostly been enthusiastic about Buy Now, Pay Later, as the payment method offers an easy way to lower purchase barriers. However, as regulations tighten, we may see smaller businesses opting out of BNPL schemes due to the perception that additional administrative and legal responsibilities will make implementation difficult.
So will impending regulation halt the growth of Buy Now, Pay Later? Without a crystal ball, it's hard to predict what the landscape will look like over the coming years. However, with the pandemic permanently altering the public's shopping habits and the current economic climate looking increasingly bleak, the majority of business leaders surveyed by ECOMMPAY believe that consumers will continue to gravitate towards this payment method, despite tougher regulations — especially as BNPL proliferates outside the retail space, in sectors such as travel and hospitality.
As the legal process grinds into motion, retailers should begin preparing for the new rules and regulations. Here are a couple of crucial steps merchants can take ahead of time.
The government has placed significant emphasis on the treatment of vulnerable consumers. Merchants will need to audit their marketing and checkout language to ensure shoppers understand what they are signing up for and that they have carefully considered the frequency and scale of repayments and the consequences of defaulting on a BNPL loan.
As well as ensuring that customers are educated and informed during the sales process, merchants should also check that their Buy Now, Pay Later provider has updated their policies accordingly. Companies issuing credit need adequate protocols to inform consumers and correctly handle those in arrears.
Merchants should begin reviewing their customer payment journeys as soon as possible to ensure that they haven’t unwittingly created an environment where consumers can quickly get into unmanageable debt. In particular, BNPL should never be used to lower the perceived overall price of a product or be pushed as a superior payment method. Buyers need to make sound decisions about potential purchases without being influenced by tempting offers or a sense of false scarcity.
There’s little doubt that regulation is about to play a leading role in the future of BNPL. As retailers and payment providers become more comfortable with the coming legislation, new technologies and innovation will continue to emerge to make the implementation of Buy Now, Pay Later more streamlined.
We’re already able to glimpse into how the future could look for BNPL, as fintech payment platforms already offer secure and seamless customer journeys, using powerful AI-based risk analysis to combat fraud without impacting the overall checkout experience. Technologies such as Open Banking will also play a leading role in BNPL’s future, enabling companies to make accurate lending decisions by leveraging shared data.
Overall, we expect to see future consumer demand for Buy Now, Pay Later accelerating the growth of fintech payment solutions aimed at retailers, whilst products and apps will continue to emerge that help shoppers better manage their finances. As the popularity of these services grows, it will become vital for merchants to choose a trustworthy payment partner who uses a reputable BNPL provider — and one that can consult with you on what constitutes a responsible and well-implemented scheme and what does not.
Olga is head of payment product development at ECOMMPAY, where she focuses on expanding the company's payment method portfolio and helping businesses to scale globally. Olga's background is in the travel industry. She has worked independently and with small agencies, handling everything that comes with running a successful business, from sales to accounting, marketing and payments. Olga's experience brings her confidence in her current position and continues teaching her something new every day.
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