Given the upcoming regulation changes, should BNPLs be worried? Adriana Ellice-Flint from receeve discusses this in detail.
The exponential growth in ecommerce and the impact of the pandemic have fuelled the rise of ‘Buy Now, Pay Later’, making it one of the biggest retail trends in the fintech space. The global transaction value for BNPLs reached USD 120 billion in 2021, according to GlobalData’s latest report. It estimates that the value will jump 380% by 2026, to USD 576 billion.
For retailers, BNPL boosts customer acquisition, increases sales, and raises overall customer satisfaction. BNPL providers pay merchants up front and issue loans to consumers while bearing all the credit risks and administration costs of running the loan programme.
For consumers, BNPL represents access to cheap and fast credit. With the lack of interest rates in a majority of cases of fees, consumers report that the BNPL experience is better than that of credit cards or overdrafts. The ability to purchase otherwise unaffordable items is popular across all demographics and has especially gained traction among millennials and Gen Z consumers.
In the lending industry, access to working capital is paramount to maintaining margins and growth. The sharp increase in interest rates has brought a halt to easy funds access and firms are finding it increasingly difficult to raise additional funds. This might force them to pass this increased cost to merchants and consumers.
BNPL company Laybuy revealed that in the last six-month period of 2021, almost half their revenue came from late fees. This is revenue gained from people’s inability to pay, and there is growing concern that BNPL practices are leading to financial hardship and debt accumulation in an industry where oversight is needed to protect consumers.
The Buy Now, Pay Later sector is not fully regulated at present. A survey conducted late last year by Credit Karma, found that more than a third of respondents who had used BNPL plans reported falling behind on payments. These increased levels of consumer indebtedness, misleading marketing, and product placement, while pushing back debit payment options are the concerns that require regulatory oversight.
The typical regulatory response will cover the inclusion of these types of lending products into the existing framework of regulations that guide the lending practices. Full credit assessment practices and consumer protection allows transparent advice and independent help for consumers.
So far the UK has been the most proactive with regard to regulations around BNPLs and unregulated credit. The consultation process on BNPL regulation closed in early January 2022. The UK Treasury said Buy Now, Pay Later (BNPL) firms would come under the supervision of the Financial Conduct Authority (FCA) by 2023.
The plan proposed is said to have the following outcomes: lenders will be required to ensure loans are affordable and rules will be amended to ensure advertisements are fair, clear, and not misleading. The Government will expand rules to cover other forms of unsecured short-term credit that pose similar risks to consumers, such as those used for dentistry work, etc. Lenders offering the product will need to be approved by the Financial Conduct Authority (FCA), and borrowers will also be able to make a complaint to the Financial Ombudsman Service (FOS).
More recently, Ireland extended its Consumer Protection Act to include BNPL companies as well as firms offering PCP plans for car purchases to be authorised by the Central Bank of Ireland as a Retail Credit Firm or Credit Servicing Firm.
Consumers who enter into BNPL agreements or what the Central Bank terms indirect credit agreements will now be covered by various aspects of the consumer protection framework including provisions of the Consumer Protection Code. An interest rate cap of 23% APR on all credit agreements apart from money-lending agreements was introduced in the act though this will be more applicable to hire purchase/PCP agreements.
At the beginning of June 2022, the European Commission launched a public consultation around the review of the second EU Payment Services Directive (PSD2), where it asks whether BNPL schemes should be included in the PSD2 list of services.
The Consumer Financial Protection Bureau (CFPB) opened an inquiry into popular BNPL programs in Jan 2022. They are particularly concerned about how BNPL impacts consumer debt accumulation, what consumer protection laws apply and how the payment providers harvest data. The leading BNPLs need to submit a detailed report on the risks and benefits of their products as part of the inquiry. This is an important first step to improving industry credit practices and protecting consumers from hitting a debt spiral.
Adriana Ellice-Flint has over 20 years of experience in banking and tech, with more than 10 years spent specifically in the banking regulatory space, where she worked for the leading vendors in regulatory solutions, which gave her exposure to all tiers of banks and their ecosystems. Lately, Adriana has been active in the FinTech space, where she has been steadily rising through the ranks of product managers, and recently became a product leader in receeve GmbH. Her global experience is helping receeve to design growth strategies and to lead the accelerated product growth.
receeve is a fully customisable all-in-one platform for collections & recovery. We simplify the growing complexity of data and systems and empower in-house teams to easily automate processes, engage customers and apply 360° insights to maximise recovery and minimise risk across every stage of credit management – from pre-delinquency to portfolio assignment or sale. A perfect balance of ease-of-use and power, receeve’s cloud-native, no-code platform is fast to deploy, simple to manage and easy to customise and expand.
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