What new buy-now-pay-later regulations mean for lenders, retailers and vulnerable customers

The Financial Conduct Authority (FCA) has published the Woolard Review this week which scrutinizes the unsecured credit market. Amongst other recommendations, the report calls for the buy-now-pay-later (BNPL) lenders, like Klarna, Paypal, Afterpay and Clearpay, to be brought under the control of the regulator and the Consumer Credit Act to protect consumers who have been using these services even more to make ends meet during the pandemic.

The British government and FCA has moved very quickly after recognizing the rapid growth in the use of such products. The review was first announced in September 2020 with a call for input in early November, and the report published at the start of February.

The review has prompted the government to act swiftly to reduce the potential for harm by requiring lenders to carry out affordability checks and ensure that vulnerable customers are treated fairly. BNPL products have rapidly increased in popularity, with the volume of transactions tripling in 2020 as the pandemic drove consumers to online shopping.

There is now a significant risk that these agreements could cause harm to consumers. The Woolard report states that “a recent survey of consumers carried out by the FCA in December 2020 found that 11% of consumers (5m individuals) said they had used a BNPL product since the start of the Covid-19 outbreak.”

This represents £2.7 billion worth of transactions in the UK alone. With lockdowns and restrictions extending into 2021 and the growth of digital channels across the globe, BNPL or point-of-sale lenders are increasingly embedded in online shopping carts – not just in the UK. As an interest-free way of delaying payment on a purchase, these credit agreements are attractive to consumers but could also pose a significant risk to vulnerable customers who may rack up too much debt.

The risks of BNPL loans

BNPL benefits consumers by allowing them to manage their finances by spreading the cost of a purchase (interest-free) across multiple payments. But there are risks which could be mitigated by bringing these agreements into regulation, including:

• Many consumers do not view BNPL as a form of credit, so do not apply the same level of scrutiny when they accept the option at checkout.
• BNPL providers tend to focus on the risk for the firm rather than affordability for the customer.
• The average transaction value tends to be relatively low, which means that customers can easily take out multiple agreements (with different providers), building up debt without credit reference agencies or other lenders becoming aware.

As BNPL providers expand to support transactions with higher-value retailers (like Peloton and Dyson), the risk of customers taking on unaffordable levels of debt increases.

What increased regulation means for customers

John Glen, Economic Secretary to the Treasury, said, “Buy-now-pay-later can be a helpful way to manage your finances, but it’s important that consumers are protected as these agreements become more popular. By stepping in and regulating, we’re making sure people are treated fairly and only offered agreements they can afford—the same protections you’d expect with other loans.”

With increased scrutiny, people can continue to benefit from these products—but with the right protections in place. Bringing BNPL into the scope of the FCA also means consumers in the UK can take complaints to the Financial Ombudsman Service if they felt that they had not been made aware of the risks and costs inherent in the product.

What these changes mean for retailers and BNPL firms

Under the supervision of the FCA, BNLP firms will need to comply with additional regulatory requirements, including:

• Carrying out affordability checks
• Ensuring that customers are being treated fairly
• Checking for signs of vulnerability, especially financial vulnerability and the customer’s ability to meet the repayments

This means that retailers who offer a BNPL option at the point of sale must ensure that these additional checks are undertaken. Retailers will have to make changes to their websites and mobile apps to ensure they are complying with all the appropriate regulatory requirements—like record keeping.

What should BNPL providers and retailers be doing now to get ready for the new requirements?

BNLP firms and retailers should start looking now at the regulations and decide:

• How the customer journey needs to be changed
• What additional information needs to be provided
• What caveats and warnings now have to be disclosed
• How to check on affordability

What to do about vulnerability

In addition, retailers and BNPL providers should be thinking about what new capabilities they need to support their digital channels in the following ways:

• Keeping a record of every digital journey to meet the FCA requirements on record keeping, especially the extent to which they need to record personal information in relation to the cost of credit, the results of affordability checks and for how long they need to retain the information
• Monitoring every session and setting up alerts to any user behaviors that may be suspicious or suggest that the customer doesn’t understand, needs help or may be vulnerable
• Undertaking reviews and investigations, either on an individual basis (such as a complaint) or as a part of a bigger review (such as the PPI issue), to prove that the customer was given all the necessary information to make an informed decision
• Responding to cases referred to the Financial Ombudsman Service

Digital channels need digital tools. Retailers and BNPL providers need digital compliance capabilities, not only to meet their new regulatory obligations, but also to enhance the support and service provided to customers online and on mobile apps. With the right tools, retailers and BNPL providers can ensure that customers receive the information they need to understand the details of the commitments they are entering into and minimize their risk.