Buy Now, Pay Later (BNPL) has enjoyed explosive growth and remarkable adoption in recent years. In the UK, the use of BNPL transactions quadrupled in 2020 to GBP 2.7 billion - before doubling again in 2021 to GBP 5.7 billion. More than 12 million people now use BNPL services, with a survey conducted in 2021 reporting that 62% of BNPL users believe it will replace their credit cards.
Yet despite its astonishing performance, the BNPL sector has remained largely unregulated. In January 2022, the UK Treasury closed a consultation that called on industry experts to share 'views on the creation of a proportionate approach' to the regulation of BNPL. The government then set out a plan to introduce new regulations in June 2022, when it announced that lenders will be required to carry out affordability checks and amended financial promotion rules to ensure Buy-Now Pay-Later advertisements are 'fair, clear, and not misleading'. Additionally, lenders offering BNPL must now be approved by the Financial Conduct Authority (FCA) and consumers have the right to make complaints to the Financial Ombudsman Service (FOS).
The regulations are designed to reduce the 'risk of harm to consumers' and will 'protect millions of people'. But will they harm or help the wider financial services industry? What role can Open Banking play in the development of BNPL and how can merchants benefit from the popularity of this new product? To answer these questions and more, Open Banking Excellence (OBE) gathered a panel of industry experts around a virtual Campfire hosted by Oana Ifrim, Lead Editor of The Paypers.
Three global players dominate BNPL: Klarna, Affirm and Afterpay (known as Clearpay in the UK and EU). Iana Vidal, Director of Public Policy and Regulatory Affairs, UK & EU, for Clearpay, said the first BNPL services were created to meet a growing demand among younger people for flexible payment options.
'There was a concern and anxiety around credit cards, revolving debt and hidden charges and fees, especially after the global financial crisis,' Iana said. 'BNPL was born out of the idea that people would want to spread payments over a short period of time to smooth those purchases and budget responsibly.'
In the UK, consumer credit is regulated by the Consumer Credit Act - which was passed a long time ago in 1974. Many BNPL products are not covered by the act and are therefore unregulated. When the Treasury announces new regulation, it will draw from the recommendations of its consultation and last year’s Woolard Review, which sets out 'how regulation can better support a healthy market for unsecured lending'.
Joanne Owens, Partner at Eversheds Sutherland, said: 'We're now waiting for government feedback from the consultation. In essence, the aim is to move BNPL into the regulated credit space so that the FCA has regulatory oversight of lenders, who would also have to become authorised. There will be a number of conduct of business requirements that would therefore apply to the product.'
The new regulations are likely to respond to concerns about consumer protection and ensure that customers cannot sign up for BNPL services they cannot afford.
Faith Reynolds, a Non-Executive Director at Fair4All Finance and former Non-Executive Director for the Payment Systems Regulator and Independent Consumer Representative for the Open Banking Implementation Entity (OBIE), said: 'Fair4All Finance has developed an affordable credit code, and it would be useful for firms to think about how close they are to its recommendations. What is their affordability assessment? What support do they offer and how do they respond when people need help with repayments? This market has a lot of work to do in mitigating risks, especially in a cost-of-living crisis which may mean customers are overstretching themselves.'
We often hear BNPL discussed in a consumer context, with conversations focused on issues such as debt and financial inclusion. However, our panellists warned that it is essential for businesses to drive the responsible development of BNPL to benefit from the value it offers and lay the foundations for sustainable growth.
Misa Zivic, CEO & Co-Founder of LeanPay, said: 'For the merchant, it is important that BNPL operators help them to increase their average ticket size to increase the conversion. The merchant needs to choose a partner who has responsible lending practices. For all big merchants, it is important to have a reputable partner that drives sustainable growth. We also need proper assessments of clients. This is the only way forward that helps consumers and enables merchant growth.'
Mikael Kylatie, CEO of the Lendiron Group, shared insights from his company’s own data, revealing one of the biggest trends in BNPL: the growth of B2B usage.
'Ecommerce has been growing rapidly due to the pandemic,” he said. “BNPL and other flexible payment methods have also been increasing steadily. Our data shows that the demand has evened out between different price categories. People are also using BNPL for lower price categories. BNPL for B2B customers has also exploded.'
Open Banking is already being described as the solution to the problem of customer assessment. When consumers opt to share their data, lenders can access their credit history in real-time to gain a picture of their finances at the moment of purchase.
James Varga, Founder & Chief Executive Officer of DirectID, explained: 'When BNPL is used at the checkout, there is a risk at that point of transaction. Affordability, responsible lending and understanding someone's financial distress or financial wellness are critical. I struggle to see any way of solving that problem other than Open Banking because it is a real-time environment. With the movement from traditional credit products like credit cards into BNPL propositions, the traditional credit bureau data that we have used for a long time just doesn't apply.'
As well as providing real-time information about affordability, Open Banking can also identify BNPL customers and help tackle fraud.
Ed Brandler is Co-Founder & CCO of Two, an online B2B invoicing plugin for merchants who want to offer payment terms to their trade customers. He explained: 'Open Banking can be used as a proxy for a digital ID and allow customers to be authenticated against their bank account. It also allows lenders to instantly offer credit to companies that don't have any credit history or records. You might be a well-capitalised company that is cash-rich, but because you have not completed any reporting, you are too young and new to get credit. Businesses that authorise lenders to look at their banking records will benefit from an instant credit decision.'
Many more insights, intelligence, and data points were shared during the Campfire, which you can watch free of charge on the OBE website.
You can register for the next OBE Campfire now. It is called 'Security & Fraud: Is Open Banking creating new challenges?', takes place on June 16 and will explore the challenges for the financial industry as the Open Banking ecosystem grows.
Helen is the Founder of Open Banking Excellence (OBE), the world’s leading community of Open Banking and Open Finance pioneers from across the breadth of financial services, including banks, fintechs, BigTech and other industry bodies.
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