“Buy Now, Pay Later” Services Attract Unwanted Attention
The uptake of “buy now, pay later” (BNPL) services sky-rocketed during the pandemic. BNPL products are attractive because they facilitate access to credit more easily. The instalments tend to be interest-free, and re-payments are expected over a shorter time frame. The profitability of this business model depends on consumers defaulting on payments or accepting a longer re-payment period with higher interest rates.
How crowded is the market?
Klarna is one of the most recognisable BNPL case studies. It dominates the sector with over 100 million active customers globally. This can be attributed to securing partnerships with big names across the high street and online. Klarna’s main competitors are Clearpay and Laybuy.
However, organisations that are not strictly dedicated to BNPL have been drawn towards the lucrative business model. PayPal introduced its “Pay in 3” option in 2020. Apple also signalled its intention to expand into financial services, most recently acquiring Credit Kudos, a British fintech start-up.
Importantly, banks are beginning to introduce this alternative form of credit. Monzo, one of the most successful challenger banks, launched its own BNPL service in September 2021. “Monzo Flex” also relies on late payments to make money and its interest rate of 19% APR on transactions that are split over a period of more than three months.
NatWest is the UK’s first high street bank with plans to follow in Monzo’s footsteps. It justifies its decision by observing a “clear demand.” The launch of the product is planned for this summer. It initially faced some criticism due to the fact that the majority of NatWest’s shares were owned by the Government. However, the bank was able to surmount this criticism after it announced on Monday the 28th of March 2022 that it returned to majority private control after buying back £1.2 billion in shares from the UK Government. John Glen, the economic secretary to the Treasury, said that this is an “important landmark in our plan to return the bank to the private sector”.
Barclays recognised the dangers of BNPL products, calling for “more robust regulation.” Nonetheless, it already offers a similar service through a partnership with Amazon. It differentiates its offering by providing no interest-free options and conducting hard credit checks. As a result, the service falls under the regulations of the Financial Conduct Authority (FCA).
The regulation of “buy now, pay later”
The appeal of “buy now, pay later” is limited by the anticipated, new regulatory framework. The present provisions governing consumer credit do not protect the majority of “buy now, pay later” consumers. Instead, they fall under the short-term invoice deferrals exception. The FCA has attempted to offer some protection under the current regime by referring to the Consumers Rights Act 2015.
A report for the FCA, published in February 2021, warned that the unsecured credit market should be addressed as a “matter of urgency.” This was followed by the Treasury’s public consultation that concluded in January 2022. The findings are likely to guide the FCA’s future agenda. The regulator already views the inquiries as successful by pointing out that they have encouraged redrafting customers’ terms.
This regulatory scrutiny is not unexpected. Klarna attempted to stay out of the regulator’s sight by introducing changes to its British operations in 2021. This included explicit messages to inform customers about their credit obligations and consequences of default payments. On the other hand, Klarna was already reprimanded by the UK Advertising Standards Authority for encouraging credit to “improve people’s moods” through its advertising.
The FCA is expected to introduce rules that impose a higher burden on the service providers, focusing on customer awareness, advertising, and conducting stricter creditworthiness checks. However, NatWest’s decision to enter the sector strongly suggests that it doubts an onerous regulatory framework will be introduced soon.
By: Zuzanna Potocka