Buy now, fine later- Understanding upcoming regulations for the BNPL market

It seems that everywhere you turn a BNPL (Buy Now Pay Later) service is being offered to you as a consumer as a substitute for upfront payments for goods or services.

By 2028, the BNPL market is expected to reach $20.40bn.  According to the FCA, the market saw a particularly drastic uptake in 2020, with global BNPL transactions reaching £2.7bn.

In essence, signing up for a BNPL service allows consumers to make staggered repayments, so they don’t need to make an upfront full payment for the chosen product.

Advertised as credit-free with 0% interest rates, this offers the consumer a perfect opportunity to pay over instalments, which many in the post-pandemic environment are opting for as they have yet to fully financially recover from the impact to their personal situation caused by the COVID outbreak.

Why has there been such a drastic movement towards BNPL?

The Australian Securities and Investments Commission stated that the number of customers utilising BNPL services has increased from 400,000 in 2015 to around 2million in 2020. Analysis conducted by Finder reported that in the UK they have witnessed a steady 39% increase in annual adoption rates for online shoppers, with market share set to double by 2023, and in the U.S 56% of consumers have used a BNPL service.

There are many contributing factors as to why this movement had seen such significant uptake globally. Setting up an account can take less than 5 minutes and little to no credit history checks are needed for many BNPL services, giving many consumers ample reason to sign up as they won’t have the opportunity to be rejected (as can be the case with more traditional consumer credit services).

This may sound like a great deal, to the parent who needs to purchase a new washing machine that has just broken or the student who cannot afford to buy the trainers he wanted, BNPL is a natural choice to spread the cost over time with little or no immediate up-front financial commitment.

Individuals also tend to purchase more items or to a greater sum than they perhaps should when they use BNPL services. Psychologically, we often think (or hope) when it comes to making ongoing payments that all will be financially fine in the future, but the pandemic has surely taught us, this is unfortunately not always the case.

The key issue here of course becomes, if customers are no longer able to make their required instalment repayments, how will the provider of these services access funds that no longer exist, and why is a risk not evaluated more stringently at the outset of the credit being afforded to the purchaser?

The need for regulation and transparency

At present regulators don’t oversee services that offer 0% interest-free rates, however with such scope for market adoption, they have been watching the industry closely. Some international players have already been fined for AML breaches, but many feel not nearly enough is being done to stop the lack of education around using a BNPL service.

Many BNPL players state that they are not selling a form of credit, but many would disagree. Just like all other forms of consumer credit, however much credit is afforded to a purchaser at the outset of a BNPL transaction, it can have a negative impact on their credit score in the future if they fail to keep up with all scheduled repayments.

However, most BNPL providers are not obligated to follow the same consumer protection laws as banks or other regulated lenders, meaning BNPL services are not required to comply with the responsible lending obligations set out by regulators.

Despite less rigorous affordability checks, BNPL can still have a lasting impact on consumers’ credit history, and many do not realise the impact of how using these services can have a negative impact in the long term.

Several issues have now been elevated as many of the individuals who sign up for these services are not privy to or do not understand the implications of missing a payment or the impacts it can have on a credit rating. Citizens Advice warned that one in 10 BNPL shoppers have been chased by debt collection services, rising to one in eight young people in the UK.

What is lacking is a regulated system that de-risks through CDD/KYC systems to future proof these services. Just because someone doesn’t have a comprehensive credit history doesn’t mean that they should not at least be validated as an absolute minimum standard. It could be argued that there should be an increase in affordability testing for BNPL products – establishing whether consumers can or cannot afford to repay the funds agreed in full.

How will upcoming regulation affect the BNPL markets in the UK, U.S, and Australia?

The UK Government has announced that all BNPL credit agreements will be regulated by the FCA. The FCA will be responsible for developing a regulatory landscape inclusive of strengthened KYC and affordability testing. BNPL entities will be subject to hefty fines should they not follow regulatory guidance, but so will their partner retailers, which will be required to become authorised credit brokers when they refer their customers to BNPL providers[1].

Now the government is looking to finalise the exact legalities of the regulation before it passes in parliament. This may take over a year, however, could be hastened, as with the implementation of the UK’s Financial Services Bill through Parliament, Treasury ministers have been contacted, suggesting an amendment to the Financial Services Bill could happen quickly.

The bottom line is that BNPL entities should be bracing themselves for compliance regulations to kick in sooner rather than later.

Over in the U.S, laws differ by state so it may be challenging to have one single legislation to abide by. The BNPL schemes are regulated by federal and state laws under consumer credit regimes, depending on the different definitions of credit covered by those laws. Low-level credit checks are conducted but regulators expect more. The industry also does not fall under the same category as lenders so they will not abide by the same lender regulations that are more strenuous and have larger fines.

On the 1st of March 2021, the Australian Finance Industry Association (AFIA) announced that its Code of Practice for the BNPL sector had come into effect. The code sets best practice standards for the sector to strengthen consumer protections and states that assessments must be performed before a customer can make a purchase, as well as to conduct additional checks to assess affordability.

The Australian Financial Complaints Authority will manage BNPL disputes under the code, where an appointed committee will have the power to publicly denounce companies that provide loan services outside of the Code’s standards [2].

What will this mean for compliance teams?

Additional resource. Simply put, more resource will be needed, to cope with additional regulatory pressures that global BNPL firms will be facing.

A scenario of trying to get yet more regulatory compliance implemented into systems and processes, to effectively conduct affordability testing and adequate KYC, is a tall order for all BNPL providers, and retailers too will have to look closely at the implications of these regulatory changes to their own current resourcing and skill sets when dealing with BNPL transactions.

With many businesses already struggling to meet current affordability requirements, predictions of additional regulatory scrutiny and processes, mixed with an ever-changing set of rules to keep up with, mean that firms must ensure they always have the right resource in place in their compliance teams.

Remediation may also come into play when regulation fully comes into force. Customers who feel they have been mis-sold credit or felt they were not fairly told about hidden fees could also be in line for pay-outs. Massive remediation efforts could be needed to help the thousands who have already been bitten by BNPL agreements.

The right people remain a vitally key component in your compliance function to ensure regulatory changes, challenges, and priorities are both met and adhered to. Automation of your current AML processes and systems can only take you so far – they need to be purposeful, and the right people will very much be needed to achieve this.

Ensuring that the skills and suitability of the individuals you retain are just as imperative, if not more so than the technology automation you implement. The human element is still the single most important element of your compliance function and regardless of what technological development or trend comes to play, this will always be true.

Ultimately, hiring the right talent should be at the forefront of ensuring your compliance team is as resilient and prepared as it can be.

If you require assistance in the form of additional resource for your compliance teams to try and keep up with new regulatory demands, contact us to see how we can help your planning, structuring, and onboarding of the right talent.

Sources cited:

[1+2] Pincovski, C. (2021). Buy Now, Pay Later Series II: regulations and risks. [online] thepaypers.com. Available at: https://thepaypers.com/expert-opinion/buy-now-pay-later-series-ii-regulations-and-risks–1249259 [Accessed 13 Sep. 2021]

[3] FCA (2021). FCA publishes review into unsecured credit market. [online] FCA. Available at: https://www.fca.org.uk/news/press-releases/fca-publishes-woolard-review-unsecured-credit-market [Accessed 9 Sep. 2021].

[4] Johnson, G.-R. (2020). Buy now pay later (BNPL) statistics | 2020. [online] Finder UK. Available at: https://www.finder.com/uk/buy-now-pay-later-statistics [Accessed 10 Sep. 2021].

[5]www.citizensadvice.org.uk. (2021). One in 10 Buy Now Pay Later shoppers have been chased by debt collectors. [online] Available at: https://www.citizensadvice.org.uk/about-us/about-us1/media/press-releases/one-in-10-buy-now-pay-later-shoppers-have-been-chased-by-debt-collectors/ [Accessed 11 Sep. 2021].