Alternative payment models forming the burgeoning “Buy Now Pay Later” (BNPL) market have made a huge contribution to the ongoing growth of the online retail sector over recent years and have made certain payment providers huge tech success stories in their own right.

The key to this success lies in the accessibility of BNPL credit to tech-savvy consumers, for whom BNPL provides an attractive alternative to more traditional (and expensive) forms of unsecured finance.  BNPL providers have leveraged this attractiveness by offering a seamless customer journey experience tailored to the mobile devices and apps which are the channels of choice for their key target demographics.

Crucially, the sophisticated technology behind BNPL facilitates easy integration with online interfaces, enabling digital retailers across the full spectrum – from global giants to small enterprises – to offer their customers alternative payment routes in return for a percentage fee on each transaction which the retailer pays to the BNPL provider.

But despite slight variations in different BNPL products, those offered by the major players are usually exempt from being a regulated credit agreement because they require payment over a period of no more than a year, in 12 or less payments and with no interest or charges payable by the consumer.

Consumer use of such BNPL products in the UK almost quadrupled over the course of 2020 and this growth has attracted the attention of the FCA. On 2 February 2021, the FCA published a review undertaken by its former Interim Chief Executive Chris Woolard (the Woolard Review), which could have a significant impact on BNPL providers and retailers alike.

While the Woolard Review is focused on the wider unsecured credit market, one headline recommendation is that BNPL products which are currently exempt from the regulatory regime should be brought within scope as soon as possible.  The Woolard Review goes on to say that the regulatory treatment of retail partners offering BNPL options must also be considered (for example, retailers who are only introducing customers to providers who enter into exempt BNPL agreements do not currently need permission from the FCA to do so).

The Woolard Review notes that BNPL, when repaid on time, gives consumers a useful route to cheaper finance than many regulated providers can offer. However, it also highlights several areas of concern, including:

  • A lack of consumer understanding of the risks of BNPL products meaning due consideration is not given to using them;
  • An assumption among consumers that BNPL products are regulated (meaning the consumer has the protections of regulation);
  • The ease of access of BNPL products to vulnerable customers;
  • The presentation of BNPL to consumers on retail sites and apps (for example as the default payment method or the simplest option to take);
  • Providers using credit risk, rather than affordability, as the driver of lending decisions; and
  • The lack of requirements on exempt BNPL providers to report to credit reference agencies, to the potential detriment of the wider credit market.

For exempt BNPL providers, any increased regulatory burden which seeks to tackle the concerns raised in the report may potentially deter new entrants to the market and lead existing players to reassess their longer-term strategy.

Assuming that BNPL providers are brought inside the regulatory perimeter in the way the Woolard Review recommends, the impact on partner retailers may also be significant. Tighter restrictions on short term credit will likely lead to an impact on sales, which will be keenly felt by the emerging breed of retailers for whom BNPL has been a core driver of growth. At the very least, any regulation would inevitably require a different approach to the way in which such products are presented to customers.

Those retailers which offer (in addition to exempt BNPL products) regulated credit products to customers are already required to be directly authorised by the FCA. However, the proposed changes would see a requirement for retailers offering BNPL credit to become either authorised or an appointed representative (AR) of a regulated firm. While the regulated firm would, in the latter case, bear ultimate responsibility for regulatory compliance, any AR retailer would have significant obligations imposed on it, which may lead some smaller retailers to withdraw BNPL products altogether.

The FCA has stated its agreement to the Woolard Review and indicated it will build its recommendations into its next Business Plan to be published in April 2021. While the detail of any new measures remains unclear, tighter regulation and greater alignment with the regulated consumer credit sector appears inevitable for BNPL.

In the meantime, prudent retailers and payment providers should consider the role that BNPL plays in their long term strategy and the potential impact of tighter measures on their business models.  They should also consider whether they need permission from the FCA for credit broking (if they do not have it already), or whether they need to vary any existing permissions.

Contributor: Edward Jeffery 

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at February 2021. Specific advice should be sought for specific cases. For more information see our terms & conditions.

Written by

Alex Williamson

Alex Williamson

Date published

16 February 2021

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