Buy Now Pay Later (BNPL), the short-term variant of retail point of sale finance, has been growing at a pace in the UK, with the now almost ubiquitous presence of options from Klarna, Clearpay, PayPal or smaller firms at online fashion store checkouts.
Concerns about BNPL aren’t completely new, but in recent weeks a Twitter-based campaign has led to growing momentum for a policy response from the Government.
#RegulateBuyNowPayLater, led by personal finance writer Alice Tapper, has won the support of Stella Creasy MP. Stella Creasy had a significant role in calling for the changes to the regulation of payday lending that have all but wiped out that sector.
In a written question in Parliament last week, Stella Creasy asked the Chancellor of the Exchequer what assessment he has made of the potential merits of the Financial Conduct Authority issuing guidance on various aspects of BNPL, including the sale of BNPL debts to collection agencies.
Most interest-free credit arrangements up to 12 months are outside of the scope of FCA regulation. There would need to be new legislation to change that - which in the midst of Coronovirus and Brexit seems unlikely in the short to medium-term.
Yet some form of new regulatory oversight of the sector seems inevitable unless the providers can quickly put in place an effective form of self-regulation.
Here’s some of the reasons why policy makers seem likely to take a close look at the sector:
Some of the marketing of BNPL must worry policy makers, particularly the involvement of online influencers. For example, Klarna’s Snoop Dogg collaboration appears to trivialise what can sometimes be an important financial decision in a way not dissimilar to Wonga’s puppet advertisements before they were axed in 2015.
Despite substantial investments by the leading providers in promoting responsible spending by consumers, the #RegulateBuyNowPayLater campaign has shown inconsistencies between this and how the firms market their services to retailers as a way of boosting the value of purchases.
Although BNPL is presented as a low-risk financial arrangement with missed payments not affecting credit scores, unpaid accounts appear to be sold to debt collectors which could take legal action against the consumer. Debt collection is used across the economy, but it is being argued that the consequences of non-payment for BNPL agreements needs to be made clearer.
BNPL should not be seen as a bad product. It is successfully used by millions of consumers as a convenient form of payment. Even for consumers who struggle to make ends meet, being linked to a specific purchase, short-term and interest-free, BNPL should usually be more suitable than other types of borrowing.
Klarna has already indicated its willingness to discuss concerns with Stella Creasy and the campaign, but AFP believes BNPL providers should now put in place a code of conduct that is independently overseen. Without this, the reputation of BNPL seems bound to suffer over time and regulation will - slowly but inevitably - follow.
It’s true that self-regulation often doesn’t work - the payday loans industry’s efforts being an obvious example - but it can be effective when done properly. One factor that helps ensure it is effective is to involve representatives of the sector’s critics in overseeing the design and operation of the code, including the handling of complaints.
Self-regulation should benefit consumers by protecting the availability of the product whilst banishing any bad practices. In the long-term, the costs of self-regulation will be lower than the alternative.