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Feature: Will regulation burst the BNPL bubble?

As BNPL continues to soar and clamour to regulate grows, industry leaders are adopting a war mentality, criticising the credit card sector. HOWEVER, the right regulation is required to prevent consumer exploitation.

          Will regulation burst the BNPL bubble?

The relentless rise of Buy-Now-Pay-Later (BNPL) as a payment method will be well-known to industry professionals.

Briefly, then, a recap: around the world, the BNPL segment is growing at more than 22 percent annually, and was worth $4.1 billion last year.

Specific markets have seen spectacular (or frightening, depending on your point of view) growth, with Canadian consumers taking on 36 percent more BNPL credit last year, and US consumers a whopping 66.5 percent. US consumers now owe a total of $14 trillion, the largest amount in recorded history.

For merchants, BNPL’s appeal lies in its simplicity – no credit agreements or waiting for credit checks –and in consumer willingness to spend.

Research from Equifax last year claimed consumers would spend up to half as much again in certain verticals if BNPL were more widely available, with a study from Alliance Data confirming that 38 percent of the 18-35 bracket would spend more on BNPL if it were more widely available at checkout.

BNPL’s proponents say it helps consumers manage costs and buy what they want when they need it, especially at a time when, according to TransUnion, three-quarters of consumers are worried about rising inflation and their economic prospects.

But there’s a darker side: earlier this year, Citizens Advice UK published a study revealing that one in ten BNPL users (1 in 8 of Millennials) had been referred to debt collection agencies, and that almost all of these referrals resulted in negative consequences for the consumer.

For all that the BNPL segment attacks the credit card sector for profiteering, it’s no stranger to making money from late payments itself, with BNPL specialist Laybuy netting more than half its 2021 revenues from late payment fees.

As Armen Najarian, Chief Identity Officer at Outseer, puts it: “As a largely unregulated form of credit at a time of rising living costs, job losses and higher taxes, some consumers are walking away with goods they have no intention of paying for. The BNPL bubble could be set to burst.”

BNPL goes in to bat

As calls for regulation mount, BNPL players are putting forward their defence.

The main argument advanced by BNPL giants is that interest is not charged on purchases that are repaid within the agreed credit window (typically 15-45 days) and that, as such, BNPL is inherently less risky for consumers than traditional credit arrangements.

Last Christmas, Klarna published research claiming that 25 percent of consumers were concerned about credit card interest and late fees, and that half of all consumers had incurred debt through credit card lending.

Klarna CEO Sebastian Siematkowski doubled down on this position when he accused the credit card industry of driving economic inequalities and indebtedness, claiming that, “those who can afford to pay off their credit card balances each month reap rewards through loyalty schemes, while those who can’t simply get into more debt.

The lowest income households pay $21 in late fees while the highest income households reap $750 in rewards.”

However, there are a number of reasons why such arguments seem to be, if not specious, then somewhat tangential.

For instance, most credit products traditionally offer a 45-56 day window before charging interest, and credit card rewards accrue to all shoppers regardless of their income or credit status.

At the same time, Klarna itself charges late fees after 60 days and, as we’ve seen, will engage debt collectors to deal with defaulting consumers.

Citizens Advice UK said that British consumers paid BNPL players £39 million in late fees last year alone, while digital security specialists Entrust say 32 percent of US consumers who took on BNPL had missed at least one payment.

While some BNPL providers such as Laybuy claim to use stringent credit checks and refuse 25 percent of all applicants, it’s not hard to see how things might go wrong, with no credit checks required by law and – in theory at least – no checks on how much consumers borrow between their credit cards and BNPL platforms.

As ever, consumers themselves are demonstrating folk wisdom, with a survey from Marqueta reporting fully 54 percent of UK consumers consider BNPL an easy way to get into debt.

Given all these factors, it’s hard not to see BNPL’s popularity as resting on the easy availability of credit from a consumer perspective, and increased sales volumes from a merchant point of view.

With most providers charging fees of around 2-7 percent per transaction plus a set per-transaction fee, BNPL certainly isn’t any cheaper for merchants than credit cards – however, the larger basket size no doubt looks attractive.

Regulators aware

From Australia and New Zealand through North America, the EU and UK, regulators have promised to take action to curb consumers’ propensity to spend on BNPL as a means of avoiding credit checking.

At a time when consumers across the developed world are set to face rising costs, high inflation and job insecurity, it’s clear that such regulation is necessary: the next question is the direction such legislation should take.

In the UK, the FCA has published the results of a review by its former interim CEO, Christopher Woolard.

This review acknowledged the lower risk of long-term indebtedness from BNPL, and clarified that regulating BNPL products along the same lines as traditional credit products would not be appropriate.

It seems likely that new rules will bring BNPL into the same orbit as credit cards, defining them as a credit product – and tighten rules regarding the way BNPL can be described in advertising and sold to consumers.

Harry Eddis, fintech partner at law firm Linklaters, says: “The Treasury and FCA agree that consumers should be protected, but do not want to regulate BNPL out of existence. However, it’s still up in the air as to how rules relating to creditworthiness assessments and pre-contractual information should apply to BNPL.”

Payments industry bodies such as Payments Europe have issued statements supporting moves towards clearer regulation of the sector, while reports from the USA suggest that some BNPL players are pre-emptively revising their credit checking policies and their terms and conditions to bring them more closely into line with those offered by traditional credit products.

It’s also important to remember that regulation isn’t the only tool in the box, and that the capacity to check credit histories automatically via an API call thanks to Open Banking could help banks to manage the risks of BNPL.

Andy Cease, Product Marketing Manager at digital security specialists Entrust, says the provisions of Open Banking can “help banks to empower merchants and BNPL providers with more insight to consumer exposures and what they can afford.”

Provided that forthcoming regulations strike a balance between consumer protection and industry growth, where the risk of financial hardship is balanced against BNPL’s benefits, such regulation should prove beneficial.

That said, we shouldn’t expect such regulation to happen overnight, as the industry will need time to implement compliance requirements and technology changes – though as inflation takes hold and consumers seek new ways of paying for the rising cost of living, we should expect calls for tighter regulation of the sector to grow.

Let’s hope such calls – and the ensuing regulation – don’t end up strangling innovation in what can be a useful and cost-effective means for consumers to spread the cost of goods and services.


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