By Adam Kirkby, Head of Sales, etika
The UK government recently announced plans to strengthen regulation in the Buy-Now-Pay-Later (BNPL) market. As a result, in the future BNPL lenders will need to be approved by the Financial Conduct Authority (FCA), and can be held responsible by the Financial Ombudsman Service if a complaint is made against them. The plan also confirmed lenders will have to carry out affordability checks, and make sure their advertisements are not misleading.
The news triggered a strong reaction from both the market as well as retailers because the new rules signal the end of BNPL functioning in an unregulated space of consumer finance.
On one hand, many lenders welcomed the announcement as a way of levelling the playing field between all consumer finance providers. On the other hand, retailers may fear that increased regulation will limit the flexibility customers enjoy with BNPL, ultimately hurting their bottom line.
The question for both consumers and businesses that rely on BNPL remains; what can we expect to see in the future from regulators and how will the industry be impacted as a result?
A move towards greater protections for BNPL Customers
It is very likely that as inflation rises and the cost of living crisis deepens, we will see regulators aim to gain more oversight of BNPL transactions and bring solutions more in line with traditional credit standards.
In a Response to Consultation, the HM Treasury noted that they have been consulting with debt advice providers who raised the concern that consumers are accumulating more debt as a result of using BNPL services because they do not see BNPL as a form of credit.
BNPL providers are not obligated to perform full affordability checks on consumers, which means they can accumulate debt across multiple lenders. A Citizens Advice report found that 54% of people facing debt collection for BNPL debts, turned to another form of borrowing to meet repayment obligations. The same report also showed that in 2021, BNPL users were charged £39 million in late feesasz.
The dangers of BNPL have also been exacerbated by inflation as consumers are turning to BNPL to meet higher costs. Credit Karma found that 60% of respondents in a 1,028 person study said they are more likely to use BNPL products due to inflation. Consumers are becoming more vulnerable to debt and its negative consequences. This is where it is important for both regulators and finance providers to step back and prioritise customer wellbeing during these times.
The future of BNPL and consumer finance
BNPL regulation will benefit the sector, retailers and the customers that rely on BNPL. There is an opportunity for the market to build better standards and drive safer growth. This will give customers the confidence they need to use BNPL services within safe parameters.
Furthermore, plans for more regulation come at a time when the cost of living crisis demands finance providers to take into account consumer wellbeing. In light of these big waves shaking up the way lenders are expected to operate, we expect to see a shift to more responsible finance solutions that promote good lending practices. Credit should be provisioned in a way that does not harm the consumer whether it be their financial wellbeing or financial health.
How to navigate the consumer finance landscape
While it may take some time for regulators and the retail consumer finance ecosystem to shift their approach, building partnerships with the right finance providers can help businesses meet consumer demands for flexible payment solutions while protecting them from negative consequences of borrowing.
Retailers selling higher-value products should look for regulated finance providers. The benefit is they already operate at higher standards and with tighter restrictions than non-regulated providers. With criticism of unregulated finance mounting, smart retailers will protect both their consumers and reputation by choosing reliable partners.
For example, at etika, we intentionally decided early on to operate under existing FCA regulations, but we offer long-term loan options for big-ticket items. Our solutions provide fair and ethical finance that is tailored to what our customers can afford. By leveraging soft-credit check technology, we can offer flexible financing solutions that do not hurt customers’ credit scores or penalise them with late fees.
Additionally, businesses and retailers should be on the lookout for finding those partners that align with their own values and purpose. A bad credit partner could impact a retailer’s reputation and weaken long established trust. etika’s approach is driven by a commitment to making finance fair and ethical.
The new rules are an opportunity to build better standards and address concerns the increased scrutiny has brought to light.
Retailers must consider their current BNPL partnerships to ensure that their values align with these third-partner lenders’ approach. With the increased media and regulatory pressures, the stakes are higher for everyone involved if they get it wrong.